Between the amount of tax owed and the amount paid is the dreaded tax gap, the amount of additional revenue that HMRC would have to use if everyone were fully tax compliant.
Every year since the 2005/6 tax year has seen the size of the tax gap charted and it indicates what the future of compliance might look like.
Once again, small businesses are the largest contributors to the tax gap, suggesting that further work will be needed to bring in the funds that are currently being stowed away.
Are small businesses making the tax gap worse?
The tax gap for the 2024/25 tax year is estimated to be around £59.2 billion.
It is the highest cash value tax gap that has been discovered since the tax gap started being recorded.
Given that it spawned from the largest ever tax bill, that is no surprise.
What is less alarming is the percentage of the tax bill that is going unpaid, as it is currently 6.4 per cent – lower than the historic high of 7.5 per cent in 2005/6.
However, the tax gap was only six per cent in 2023/24, so the problem is getting worse rather than better.
We discussed how small businesses were the biggest contributors to the tax gap last year and here they are again.
62 per cent of the tax gap is still the fault of small businesses, exactly as it was last year and close to what it has been for the past five years.
Mid-size businesses are showing glacial improvement and now only contribute eight per cent to the tax gap, down from the 13 per cent they managed at the start of the decade.
Put together as the umbrella of SMEs, that is 70 per cent of the tax gap originating from one section of society – approximately £41.44 billion.
How will tax compliance improve?
If we had the answer to how to close down the tax gap entirely so that everyone paid what they owed, we would be immensely popular with HMRC.
As it stands, there are clear signals that more needs to be done and a coalition of accountants and small businesses working together for better tax practices could be the key.
If you have been curious about any of the changes that HMRC have been making or discussing recently that are designed to bolster tax compliance with small businesses, wonder no more.
Any changes to the rules to make compliance more rigidly enforced will affect businesses of any size, so it is vital to keep an eye on what may come further down the line.
Our expert team are here to ensure that your business is not contributing to the tax gap, meaning that you do not have to worry about new measures.
We understand that running your business can get in the way of keeping up with tax obligations, but we are here to support you so you can focus all your energy where it is needed.
We can also support you in becoming more tax efficient so that the tax bills you do pay are reduced and in line with what you should be paying.
This optimisation could be why large businesses are not responsible for the tax gap in the same way – they operate tax-efficiently, so can better manage the bills they do face.
HMRC will not accept any excuses for the tax gap and will likely be increasing the pressure if the planned £10 billion tax gap reduction by 2029/30 is to be achieved.
Concerningly, the goal is a cash figure rather than a percentage, so higher tax bills may work against this goal, resulting in more severe compliance measures becoming necessary.
Don’t let your business be part of the tax gap problem. Get in touch with our team today.