UK Tax Gap Leaves £46.8 billion Unpaid – Small Businesses the largest offenders
In its latest report, HMRC estimates that for the fiscal year 2023–24, the UK tax gap is 5.3 %. This equates to £46.8 billion of uncollected tax, set against £876.0 billion of theoretical liabilities.
In the report, published 19 June 2025, the largest tax type of unpaid bills is Corporation Tax. By business sector, it is small businesses. Here, small businesses failed to pay 40 per cent of the corporation tax owed.
This shows a need for professional tax advice for small businesses, especially with regards to Corporation Tax.
The long-term trend shows a gradual reduction in percentage terms. This is down from 7.4 per cent in 2005–06 to 5.1 per cent in 2017–18. However, in cash terms, the gap has grown by around 44 per cent over the period.
Breakdown of the UK Tax Gap by Tax Type
- Corporation Tax accounts for the largest share at 40 per cent of the total tax gap.
- Income Tax, National Insurance contributions and Capital Gains Tax together represent 31 per cent.
- VAT forms 19 per cent, with the remaining gap composed of excise duties and smaller tax types
Trends by tax type since 2005–06 include:
- Corporation Tax: climbed to 15.8 per cent in 2023–24. (But had dropped from 11.4 per cent to 6.4 per cent by 2011–12).
- Income Tax/NICs/CGT: rose from 4.5 per cent to 5.3 per cent by 2013–14, before falling to 3.0 per cent.
- VAT: declined steadily from 13.8 per cent to 5.0 per cent over the same period
- UK Tax Gap by Customer Group – Small Businesses are the Largest Culprits
Small businesses now account for 60 per cent of the total UK tax gap. This is up sharply from 48 per cent in 2019–20. In contrast, large businesses account for only 12 per cent, mid-sized firms 9 per cent, and criminals 9 per cent. Both individuals and wealthy individuals together make up 10 per cent.
Small businesses (firms turning over under £10 million with fewer than 20 employees) failed to pay 40 percent of Corporation Tax owed. This amounted to roughly £14.7 billion of unpaid tax.
Behavioural Drivers of Non-Compliance
HMRC attributes the tax gap primarily to taxpayer conduct:
- Failure to take reasonable care: ~31 per cent
- Error: ~15 per cent
- Evasion: ~14 per cent
- This framework acknowledges that inadvertent under‑payments constitute a substantial proportion of the gap, not just deliberate tax avoidance.
Analysis and Strategic Considerations of the UK Tax Gap
While the headline proportion of the tax gap appears stable or reduced over time, the persistent growth in absolute terms emphasises the challenge for revenue collection authorities. HMRC’s annual figures are accompanied by revisions. This is as methodology, data quality and compliance yield outcomes evolve, contributing to retrospective adjustments in prior years’ estimates.
Small business non-compliance remains the most significant concern. Industry analysts have suggested that HMRC may have effectively “lost control” of tax compliance among smaller firms. They cite this maybe due to complexity, limited support responsiveness and insufficient oversight.
Efforts to address these issues include a government allocation of £1.7 billion in additional funding for HMRC compliance and debt management over the coming years. This is alongside plans to raise £7.5 billion a year by 2029–30 through targeted enforcement. There will also be and a smarter risk-based strategy.
Implications for Business Owners
For business owners, these figures underline the urgency of robust tax governance, especially for smaller enterprises. Ensuring accurate returns, proactive communication, and a clear understanding of compliance expectations is essential to reduce exposure to penalties and revenue shortfalls.
The evolving HMRC strategies, improved data analytics and compliance yield mechanisms are gradually refining the tax gap estimations. Yet volatility in estimates underlines the importance of ongoing scrutiny and accurate record-keeping to support overall integrity in the UK tax system
Businesses needing assistance should speak with qualified tax specialists, such as Alexander & Co, to ensure tax compliance. This will help avoid HMRC fines, penalties and potential tax investigations.
Contact Alexander & Co for Corporate Tax Advice
Alexander & Co has circa 50 years of experience in helping businesses with their tax and accounting needs. From small businesses to large, global entities, we can help you through all stages of growth.
With offices in Manchester city centre and London, our tax accountants are ideally placed to advise and assist individuals and businesses across the UK.
To contact a corporate advisor, call us on 0161 832 4841. Alternatively, email info@alexander.co.uk or complete our online enquiry form and we will be in touch.
