UK tax gap widens as HMRC flags rising small business compliance risk

Traders Union
All News
Financial News
UK tax gap & HMRC risk

Highlights

HMRC estimates the UK tax gap at £59.2bn or 6.4 per cent of liabilities for 2024-25, up from £52.8bn or 6 per cent a year earlier.
Small businesses contribute 62 per cent of the total gap in 2024-25, unchanged from last year but up from 58 per cent in 2020-21, with compliance risk rising.
The UK government allocates £1.7bn in the 2025 Spending Review for 5,500 additional compliance staff and 2,400 debt management staff to strengthen enforcement.

HMRC estimates show broader shortfall

As reported by the Financial Times, the UK tax gap reaches £59.2bn in provisional estimates for 2024-25, equal to 6.4 per cent of total theoretical tax liabilities published on Tuesday. That compares with £52.8bn, or 6 per cent of liabilities, a year earlier, while HMRC says it collects £865.2bn, representing 93.6 per cent of all tax due.

Small businesses account for 62 per cent of the total gap in 2024-25, unchanged from the previous year but higher than 58 per cent in 2020-21. HMRC says there is emerging evidence that the small business tax gap may have been understated in earlier years, while large businesses account for about 12 per cent of the gap across the period.

By behaviour, failure to take reasonable care in filing returns remains the largest contributor to the gap, followed by errors. By tax type, corporation tax makes up 35 per cent of the gap, while the combined income tax, National Insurance and capital gains tax gap also represents 35 per cent, and Stamp Duty Reserve Tax has the smallest gap at 1 per cent.

Policy response focuses on enforcement and system reform

Tax specialists say HMRC continues to face structural obstacles in reducing non-compliance among smaller companies. Laurence Field, partner in corporate tax at Crowe, says small businesses are numerous and resource-intensive to pursue for a lower return, while a tougher approach also carries political risks because SMEs are seen as important drivers of growth.

Emma Rawson, director of public policy at the Association of Tax Technicians, says enforcement alone is unlikely to close the gap because many owners are trying to comply with an increasingly complex tax system while managing day-to-day operations. Ellen Milner, director of public policy at the Chartered Institute of Taxation, links the government’s newly announced review of how businesses interact with HMRC to efforts to reduce the small business gap and tax errors.

The UK government makes closing the tax gap a key priority and, in the 2025 Spending Review, allocates HMRC £1.7bn for 5,500 additional compliance staff and 2,400 debt management staff. HMRC is also advancing Making Tax Digital, while chief executive John-Paul Marks says a modern tax system is needed to make compliance easier first time and strengthen the response to non-compliance and criminal activity.

In our earlier article on the UK’s prolonged weak growth and its political and policy implications, we outlined how competing narratives around Brexit and post-crisis policy have obscured lessons from the last sustained period of expansion. We also noted that structural headwinds and fragile growth leave policymakers facing tougher trade-offs as they try to rebuild credibility and improve long-term performance.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.