The tax gap explained
Recently released figures suggest that a staggering £46.8 billion of tax owed to HMRC remains unpaid. For the 2023-24 tax year a tax gap of 5.3% exists – down slightly from a revised figure of 5.6% for 2022-23 – and small businesses appear to be the biggest offenders.
According to the figures, small businesses hold the largest share of unpaid tax, with £28.08 billion due from these types of companies. The majority of this is unpaid corporation tax, of which £14.7 billion is owed; a further £5.8 billion is owed in Self-Assessment payments, while £900 million is due in PAYE.
An increase in uncollected tax from small businesses
Before the pandemic, unpaid tax from small businesses accounted for 48% of the total share, so a rise to 60% is significant. According to the Association of Tax Technicians, 46% of the tax gap is due to a failure of businesses to take reasonable care with their returns, resulting in £21.7 billion in losses. Evasion and avoidance accounts for a comparatively small figure of £7.1 billion.
The role of small businesses in the tax gap highlights some fundamental problems with compliance by sole traders and small and micro entities. Tax is renowned for being a difficult area to navigate, so increasing the help available to this segment or improving guidance could help smaller companies to comply. Several factors contribute to errors being made on tax returns, such as an increasingly complex tax system, worse service from HMRC, cost-cutting and an inflationary environment.
The government hopes that the introduction of Making Tax Digital (MTD) for Income Tax will help to reduce the number of errors. The new system requires tax returns to be submitted digitally every quarter. However, the first of the phased rollouts for MTD is not due until April 2026, and will only apply to sole traders and landlords with a qualifying income of over £50,000.
How to avoid non-compliance
It’s easier than you might think for small businesses to underpay their tax. Expenses can be misclassified, income can be inaccurately calculated, and record keeping may not be consistent or up to date. All of these errors can result in a significant underpayment, and potentially lead to penalties from HMRC.
In order to ensure your business is compliant, there are several things you can do:
- Ensure all key tax dates – such as deadlines for submitting returns and payments – are diarised with timely reminders set up.
- Ensure accurate records are kept throughout the year. It’s a good idea to allocate bookkeeping tasks to a specific member of staff or team to facilitate consistency. Alternatively, an external accountant can assist with bookkeeping.
- Keep receipts for all costs related to running the business, including purchases, travel expenses, meals and accommodation.
- Use accounting software to assist with bookkeeping, invoicing and more. This makes it easier to enter, track and manage all transactions.
- Ensure tax returns are prepared ahead of the submission deadline so that if you experience any issues there is plenty of time to resolve them.
If you need help with tax calculations and compliance, get in touch with a reputable accountant today.
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