The Chancellor has “lost control” of a key sector of the UK economy as small businesses did not fork out more than 40% of the corporation tax they owed in 2023-24. The amount of cash owed increased from £12.3billion to £14.7billion, according to HMRC figures released yesterday. This is despite the overall “tax gap” between the total money due and collected decreasing in the year, easing back from an upwardly revised 5.6%, or £46.4billion in 2022-23, to 5.3% in 2023-24.
This suggests £46.8billion was unpaid in the 2023-24 tax year, with HMRC collecting £829.2billion, representing 94.7% of all tax due. Out of the £36.7billion that officials estimated to be owed by small businesses, only £22billion was attained, which left a 40.1% hole. The corporation tax gap overall jumped to 15.8%, the highest for more than a decade, in the year to April 2024, and the data shows that by customer group, small businesses are the largest component of the tax gap, at a 60% share.
This is up from 48% five years ago.
“HMRC has done an impressive job reducing the large company tax gap in the last 20 years,” Dan Neidle, founder of the Tax Policy Associates think-tank, told The Financial Times. “But they seem to have lost control of the small company tax gap.”
Rachael Griffin, tax and financial planning expert at Quilter, said the rise in the corporation tax gap is the “standout concern” in the data.
“That’s a red flag for policymakers, especially as economic uncertainty and global tax competition continue to put pressure on business revenues,” she said.
She added the rise is “likely driven by a mix of economic strain, increased complexity in the global tax system, and perhaps a lag in HMRC enforcement capacity”.
Ms Griffin added: “Another persistent pressure point is the UK’s small business sector… this underscores the ongoing challenge of ensuring compliance in a large, diverse and often under-supported part of the economy.”
Figures however showed the VAT gap falling to 5% from 13.8% in 2005-06, and the income tax, national insurance and capital gains tax gap dropping to 3% from a high of 5.3% in 2013-14.
The Government said the combined share of the tax gap attributed to individuals and the wealthiest now accounts for only 10% of the overall.
Ms Griffin said: “However, with frozen thresholds and lower allowances, for dividends and capital gains in particular, more people are being pulled into the tax system for the first time, often without realising it.
“That raises the risk of accidental non-compliance, especially where income is irregular or reporting requirements are poorly understood.”