Every year, HM Revenue & Customs (HMRC) publishes the latest tax gap figures – revealing the difference between the amount of tax due and the amount that they actually collect.
Compared with a tax gap of 7.4% in 2005–2006, the first year of taking these records, the most recent revised figures for the 2022–2023 tax year put the current tax gap at 4.8%.
While this percentage has stayed the same since 2020–2021, in monetary terms, the tax gap has been increasing along with tax liabilities – rising from £31 billion the previous year to £35.8 billion in 2021–2022, then reaching a record high of £39.8 billion in 2022–2023.
This is the largest the tax gap has ever been in cash terms, and while some of the increase will be a result of non-payment due to the rise in company insolvencies affected by the pandemic, small businesses are now taking the blame for up to 60% of all uncollected taxes.
Small companies defaulting on tax
The tax gap share attributed to small limited companies – with an annual turnover of less than £10 million and fewer than 50 employees – has escalated significantly in the last 5 years.
Accounting for 44% of the overall tax gap back in 2018–2019, small businesses are now responsible for 60% of the gap in expected tax takings in 2022–2023. While the pandemic was the probable cause of the uptick around 2020, the same effect didn’t happen for other business sizes – and the increase in unpaid taxes for small businesses hasn’t slowed down since.
Small companies are the worst offenders when it comes to not paying Corporation Tax, in particular.
Not only has the total of unpaid Corporation Tax bills almost tripled from £3.7 billion in 2018–2019 to £10.9 billion in 2022–2023, but small businesses are responsible for 32.3% of this tax gap – with 45% of small companies submitting incorrect returns and under-declaring liability.
In comparison, mid-sized businesses account for 11% of the overall tax gap and 6.7% of the Corporation Tax gap, while large businesses are responsible for 11% and 2.9% respectively.
Increased liabilities and high tax take
The recent figures also illustrate how much HMRC’s tax take has increased – with the theoretical total growing by about 15% each year, and almost doubling since 2005–2006.
Between the 2020–2021 to 2022–2023 tax years alone, the agency’s tax take rose from £640.1 billion to £823.8 billion, which is a high record of 95.2% of all tax due that year.
As a portion of the GDP (gross domestic product – the market value of goods and services), tax receipts have maintained a steady 28% over the last 20 years, but now represent just over 30%.
However, HMRC clearly has a lot of work to do to address the remaining tax gap, especially where small businesses are concerned. After all, if the Corporation Tax gap hadn’t increased, or had shrunk in line with other business sizes, HMRC could have collected a further £7.5–£9.5 billion in tax.
Non-compliant tax behaviour
The two behaviours that contribute to the tax gap the most are failure to take reasonable care and criminal action. Even if it isn’t done intentionally, like criminal action such as tax avoidance, filing errors resulting from a lack of care are responsible for almost half of unpaid tax bills.
HMRC expects small business owners and limited company directors to take a higher level of care compared to sole traders to ensure they understand and fulfil their tax obligations.
If you own a small company and fail to report accurate financial information to HMRC or neglect to pay outstanding tax without a ‘reasonable excuse’, the agency can also issue tax penalties.
It’s essential for businesses of all sizes to stay on top of their accounts and legal obligations, especially with the roll-out of Making Tax Digital creeping up on previously exempt earners.
So, if you need help managing your tax liabilities and ensuring that your small business is tax compliant, it’s likely you would benefit from contacting our accountants in Barnsley.
Here at gbac, we provide a range of professional financial services for all kinds of businesses and individuals – so why not call 01226 298 298 or email info@gbac.co.uk to speak to our team?