The Tax Gap: Why SME compliance matters
The tax gap, the difference between the amount of tax owed and the amount collected, has long been a thorn in HM Revenue and Customs’ (HMRC’s) side.
According to its recent ‘Measuring Tax Gaps 2025’ statistics, HMRC believe that a total of £46.8 billion of tax was uncollected in 2023-24. This equates to roughly five per cent of the overall tax owed in the UK.
The statistics also identify SMEs (turnover below £10m and fewer than 20 employees) as the largest contributors to the tax gap, accounting for 60 per cent of the shortfall.
Inevitably, as HMRC look to try and recoup some of what is owed, it is likely that SMEs will face scrutiny as a result – for example, targeted Corporation Tax enquiries.
In the 2023/24 fiscal year, HMRC only collected £22 billion in taxes from small businesses, despite £36.7 billion being owed.
Of the taxes making up the gap, Corporation Tax was responsible for 40 per cent of the outstanding amount.
While it is unlikely to be able to recoup every penny, the Government plans to raise an extra £7.5 billion by funding an additional 5,500 compliance and 2,400 debt management staff.
Plenty of SMEs do pay their taxes, but for those considered to be part of the ‘gap’ there are a number of reasons why this might be the case, encompassing everything from evasion to inaccuracy.
HMRC believe that failure to take reasonable care and errors are largely to blame for outstanding tax, and it is perhaps true that those responsible for operations in a small business may find the tax system confusing, or otherwise not have the resources to achieve accurate financial record-keeping.
Reluctance to get on board with ‘digital transformation’ might also be blamed for this, with some SMEs seeing digital solutions as expensive or complicated.
The enforcement of Making Tax Digital (MTD) for Income Tax may go some way to address the tax gap for micro businesses, sole traders and landlords, but with the rollout of MTD for Corporation Tax some way off, HMRC needs to take a multi-faceted approach to closing the tax gap.
To achieve compliance, small businesses must prioritise accurate and robust record-keeping, and meeting any reporting deadlines.
By proactively updating records, investing in digital infrastructure for your business, or speaking with your accountant, you can avoid issues further down the line. Speak to our experts today for practical support with tax compliance.
We pride ourselves on delivering bespoke balanced solutions, combining strategic business advise with expertise in accountancy, tax and other specialist areas. We can help you to turn the numbers in to something meaningful, so that your business can realise its full potential.
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