Close the tax gap, patch the potholes – Are small businesses bad at paying tax?

Like a pothole opening up between a drain cover and the rest of the road, the tax gap is causing the UK economy to have an unnecessarily bumpier ride.

Since the 2005/6 tax year, the size and scope of the tax gap have been tracked, with that data influencing how compliance policies are formed and imposed.

Small businesses are once again in the firing line, with HMRC poised for a more severe crackdown if things do not change.

Do small businesses make the tax gap bigger?

The tax gap has hit a record high cash value as the 2024/25 tax year saw the amount left on the table reach £59.2 billion.

You may recall that the 2024/25 tax year did have the biggest take of tax on record, so a higher value tax gap may be considered a natural byproduct of that.

What is less understandable is the fact that the tax gap is actually getting bigger despite attempts to improve compliance.

The 2023/24 tax year caused concern with a six per cent tax gap, but this has now risen to 6.4 per cent.

While not at the historic high of 7.5 per cent that was discovered during the first recording in 2005/6, the movement is in the wrong direction.

What is not moving at all is the extent to which small businesses are responsible for the tax gap.

62 per cent of that astounding figure is the work of small businesses and this rate of non-compliance has remained relatively steady for at least the last five years.

In contrast, mid-size businesses have been doing the work, bringing their contributions to the tax gap down from 13 per cent at the start of the decade to eight per cent.

For those of you who like a quick bit of maths, you may have clocked that the umbrella term SME describes businesses responsible for 70 per cent of the tax gap – approximately £41.44 billion.

What will make tax compliance improve?

Anyone who could find a way to get every small business in the UK fully tax compliant would be incredibly popular with HMRC.

On a smaller scale, the significant contribution to the tax gap is likely the result of a patchwork of errors and misunderstandings, so addressing these is a good place to start.

Small businesses are under immense pressure to keep the business running and growing, with many business owners not wanting to waste time learning tax rules.

We agree that it would not be the best use of your time- that’s why we offer to do it for you.

Our expert team are well-versed in tax obligations and regulations, so we can help your business stay compliant while also optimising your approach to ensure that you are tax efficient.

Large businesses likely do not contribute as much to the tax gap, as they will be operating more tax efficiently and better able to pay what bills they must as a result.

Engaging with your tax obligations is best done with expert support, especially if regulations continue to change.

If we start to see more compliance crackdowns announced, then look back to these statistics to understand why HMRC has decided that such measures are necessary.

HMRC has planned to reduce the tax gap by £10 billion by 2029/30, but the increasing value of tax being collected may mean a stricter compliance approach is necessary to even scratch the surface of this goal.

Whatever might be coming your way in terms of tax regulation changes, we will keep you confidently compliant.

Take the trouble out of tax so that the gap can finally close. Get in touch with our team today.