HMRC Tax Gap Reaches £59.2bn – Why Small Businesses Need to Get Their Tax Right

HMRC Tax Gap Reaches £59.2bn – Why Small Businesses Need to Get Their Tax Right

HMRC’s latest figures show that the UK tax gap has reached £59.2 billion for 2024/25, an increase of £6.4 billion on the previous year and the highest amount ever recorded.

The tax gap represents the difference between the tax HMRC believes should be paid and the amount actually collected. While the overall tax gap of 6.4% is slightly lower than the final figure of 6.6% for 2022/23, the actual amount of uncollected tax continues to rise.

For comparison, the tax gap in 2019/20 was £40.1 billion.

Small businesses account for the largest share

Small businesses continue to account for the biggest proportion of the tax gap, representing 62% of the total in 2024/25.

Around half of the tax gap attributed to small businesses relates to Corporation Tax, with HMRC identifying businesses that have not paid the correct amount.

However, Corporation Tax is not the only area where mistakes can occur. Income Tax Self Assessment, National Insurance Contributions (NICs), Capital Gains Tax (CGT) and VAT can all contribute to an incorrect tax position.

For busy business owners, keeping up with increasingly complex tax rules can be difficult, particularly when they are also trying to run and grow their business.

Mistakes aren’t always deliberate

It is important to remember that a tax gap does not necessarily mean deliberate tax avoidance or evasion.

HMRC reports that 35% of the tax gap was attributable to a failure to take reasonable care, which remains its largest behavioural risk. A further 16% was attributed to error, while evasion accounted for 12%.

Mistakes can happen for many reasons. Poor record keeping, misunderstanding tax rules or simply not knowing that legislation has changed can all result in a business paying too much or too little tax.

With the tax system becoming increasingly complicated, having accurate accounting records and appropriate professional advice can help businesses reduce the risk of making costly mistakes.

Corporation Tax now accounts for 35% of the total tax gap, making it a particularly important area for small businesses to get right.

VAT is also significant, accounting for 20% of the total tax gap in 2024/25 through non-payment, errors and fraud.

For VAT-registered businesses, accurate bookkeeping and regular checks are essential to ensure the correct VAT treatment is applied to sales, purchases and expenses.

HMRC Chief Executive has acknowledged that the tax system needs to make it easier to get things right first time and harder to get things wrong.

This is particularly relevant as further tax compliance requirements are introduced, including the continuing expansion of Making Tax Digital (MTD).

HMRC has been given an additional £1.7 billion in funding over the next four years to increase compliance activity and tackle avoidance and evasion. Measures announced since the 2024 Budget are also intended to raise a further £10 billion a year by 2029/30 by reducing the tax gap.

However, enforcement alone is unlikely to solve the problem.

What does this mean for your business?

The latest figures are a useful reminder that getting your accounts and tax right is more important than ever.

HMRC is investing in additional compliance activity and increasingly using technology and AI to identify potential discrepancies. Businesses should therefore make sure their accounting records are accurate, up to date and capable of supporting the figures included on their tax returns.

Good bookkeeping is not simply about producing year-end accounts. It provides the information needed to make informed business decisions and helps ensure that Corporation Tax, VAT, payroll and other tax liabilities are calculated correctly.

At Kennedys Accounting, we work closely with business owners to provide practical accounting and tax support. Whether you need help with bookkeeping, accounts, VAT, Corporation Tax or your wider tax affairs, we can help you understand your responsibilities and keep your business on the right track.

If you are concerned that your accounting records or tax affairs may not be where they should be, talk to us today.