Tax gap at £36bn – small businesses to face HMRC scrutiny?

According to a recent report by HMRC, the amount of unpaid tax for 2021/22 remained at an all-time low of 4.8% (£36 billion). While it’s good that the tax gap remains low, small businesses are responsible for 56% of this unpaid tax. Given this, it’s highly possible that HMRC will ramp up tax investigations into SMEs.

What is the tax gap?

The tax gap is the difference between the amount of tax that should be collected by the government and the amount that is actually collected. Every year HMRC publishes new tax gap figures. These are estimates as it is impossible to know exactly how much tax remains unpaid. The figures include all taxes, including income tax, corporation tax, VAT and others.

What are the headline tax gap figures?

The amount of unpaid tax for 2021/22 remained steady at 4.8%. This equates to £36 billion. However, the amount of unpaid tax for 2020/21 was £31 billion because overall tax liabilities were lower that year.

Who is responsible for unpaid tax?

According to HMRC, the groups responsible for the tax gap in 2021/22 are:

• Small businesses (56%, £20.2 billion)
• Criminals (11%, £4.1 billion)
• Large businesses (11%, £3.9 billion)
• Mid-sized businesses (11%, £3.8 billion)
• Non-wealthy individuals (6%, £2.1 billion)
• Wealthy individuals (5%, £1.7 billion)

In recent years, HMRC has put a lot of work into tackling tax evasion by large businesses and high-net worth individuals. It has had a reasonable amount of success in tackling the tax gap for large businesses. This is down from 18% of the gap in 2017/18 to 11% in 2021/22. However, the gap for small businesses has grown significantly during the same period. It accounted for 40% in 2017/18 and has risen steadily to reach 56%.

Which taxes account for the gap?

HMRC bundles some taxes together when accounting for the tax gap. The latest figures are as follows.

• Income tax, NI and CGT (35%, £12.7 billion)
• Corporation tax (30%, £10.6 billion)
• VAT (5.4%, £7.6 billion)

Other taxes that account for a smaller proportion of the gap include excise duties, stamp duty and landfill tax. The gap for VAT has fallen significantly over the last decade and half, while new data has seen the corporation tax gap being revised upwards.

What is causing unpaid tax?

HMRC has identified six main behavioural reasons for the tax gap. These are:

• Failure to take reasonable care 30%
• Error 15%
• Evasion 13%
• Legal interpretation 12%
• Criminal attacks 11%
• Non-payment 9%

Why is the small business tax gap so high?

It’s likely that the small business tax gap is high because HMRC has focused much of its compliance work elsewhere. Successful investigations into large businesses and wealthy people can yield big returns per case. When it comes to SMEs, investigations often take longer and are less likely to result in large returns for the taxman.

That said, with the small business tax gap now accounting for over half of unpaid taxes, it’s highly likely HMRC will put extra resources into reclaiming those taxes. For this reason, if you have a small business we strongly recommend asking THP to make sure your accounts are compliant. If you’ve made a mistake with your taxes, penalties tend to be much lower if you tell HMRC yourself.

Finally, in case the taxman does come knocking, we recommend you take advantage of our tax investigation fee protection service. Tax investigations can be both time consuming and expensive, even if you’ve done nothing wrong. With this service, you’re covered by up to £100,000 of our fees as we defend your case.