Small businesses top tax gap defaulters

For 2022/23, the tax gap has increased to a record £39.8 billion, with small businesses being blamed for around 60% of uncollected taxes.

19 Jul 2024

The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC and, what is actually paid. Despite the record high receipts in monetary terms, the overall tax gap has fallen in percentage terms. It is now estimated that 4.8% of taxes are unpaid compared with 7.4% back in 2005/06.

Small companies

The worst offenders are small limited companies, with the amount of unpaid corporation tax now standing at £10.9 billion, nearly triple the £3.7 billion of five years ago. This means:

In percentage terms, the tax gap for small companies is a somewhat alarming 32.2%.
Some 45% of small businesses have submitted an incorrect corporation tax return containing an under-declared tax liability.

By comparison, the tax gap for mid-sized companies is 6.7%, and for large companies is 2.9%.

High tax take

The recently released figures also give a stark illustration of how much the tax take has increased:

The theoretical amount of tax liabilities has been growing at around 15% a year, increasing from £640.1 billion for 2020/21 to £823.8 billion in 2022/23.
The theoretical amount has nearly doubled since 2005/06.

Tax receipts as a proportion of GDP over the past 20 years have previously been steady at around 28% but now stand at just over 30%.

Behaviour

The two types of behaviour contributing most to the tax gap are:

failure to take reasonable care; and
criminal actions.

Failure to take reasonable care means not spending the time and effort to make sure reported figures are correct. Directors of limited companies are generally expected to exercise a higher level of reasonable care compared to small sole traders.

Small businesses with limited experience can fall into the trap and end up guilty of one of these types of behaviours due to cheap or poor advice. If you need help with your tax liabilities, please get in touch.

HMRC’s summary of the latest tax gap figures can be found here.