The UK’s tax gap has reached a record £59.2 billion, according to HMRC’s latest figures, with small businesses accounting for almost two-thirds of the total.
The tax gap measures the difference between the amount of tax HMRC believes should theoretically be collected and the amount actually received.
For 2024/25, that difference represented around 6.4% of the total tax theoretically due. While the percentage has been higher historically, the recent direction of travel will be of particular interest to business owners as HMRC looks for ways to increase tax receipts.
The latest figures show that the tax gap has generally increased in recent years, rising from 5.7% in 2021/22 to 6.4% in 2024/25.
They also demonstrate why previously published tax gap figures need to be treated with some caution.
HMRC regularly revises its estimates as more information becomes available. The tax gap for 2023/24, for example, was previously estimated at 5.3%. It has now been revised upwards to 6.0%, adding around £6 billion to the previous estimate.
Perhaps the most significant figure for business owners is the contribution made by small businesses.
HMRC estimates that they accounted for 62% of the total tax gap in 2024/25, up four percentage points from 2020/21.
Corporation Tax is a particular concern, with HMRC estimating that around 45% of the Corporation Tax theoretically due from small businesses was not collected.
Figures of this scale inevitably attract government attention. We are already seeing a greater emphasis on corporate transparency, including the introduction of identity verification requirements for company directors and people with significant control.
For business owners, the message is clear. Good records, accurate returns and strong financial controls are becoming increasingly important as HMRC focuses its compliance activity on areas where it believes significant amounts of tax are being lost.
It would be easy to assume that a £59.2 billion tax gap is largely the result of deliberate tax evasion and aggressive tax planning. HMRC’s figures paint a rather different picture.
The largest behavioural contributor is failure to take reasonable care, which accounts for 35% of the tax gap, equivalent to nearly £21 billion.
HMRC associates this category with issues such as carelessness, negligence and poor record keeping. However, businesses are also operating within an increasingly complex tax system, where an innocent mistake can have significant consequences.
When taxpayer errors are added to failure to take reasonable care, more than half of the tax gap comes from taxpayers who may consider themselves entirely tax compliant.
By comparison, deliberate tax evasion accounts for 12% of the tax gap, while tax avoidance represents just 1%.
The £59.2 billion headline will inevitably strengthen the case for further HMRC compliance activity, but businesses should pay just as much attention to what sits behind that figure.
The data shows that the tax gap is not simply about businesses deliberately refusing to pay tax. Record keeping, errors and failure to take reasonable care make up a substantial proportion of the problem.
For small business owners in particular, this should be a prompt to review the quality of their financial information and tax processes.
Keeping accurate records, using appropriate accounting software and seeking advice before completing unfamiliar or complex transactions can all reduce the risk of an unexpected tax problem later.
As HMRC increases its focus on closing the tax gap, being able to demonstrate that reasonable care has been taken could become just as important as ensuring the final tax calculation is correct.
HMRC’s summary of the latest UK tax gap figures can be found here.
All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.
