HMRC reveals surge in corporation tax gap and small business non-compliance

The corporation tax gap jumped to 15.8% – its highest for more than a decade – in the year to April 2024.

HMRC figures show corporation tax accounts for nearly half of Britain’s £46.8 billion tax gap (PA) (PA Wire)

Corporation tax accounts for nearly half of Britain’s £46.8 billion tax gap amid a rise in non-compliance from small businesses, according to the latest figures from HM Revenue & Customs.

HMRC revealed the corporation tax gap – the difference between the amount of tax expected to be due and what was actually paid – made up 40% of the total UK gap in 2023-24.

The corporation tax gap jumped to 15.8% – its highest for more than a decade – in the year to April 2024.

The data shows that by customer group, small businesses are the largest component of the tax gap, at a 60% share, up from 48% five years ago.

HMRC said small business non-compliance is driving the rise.

The overall UK tax gap eased back from an upwardly revised 5.6%, or £46.4 billion in 2022-23, to 5.3% in 2023-24.

This means £46.8 billion was unpaid in the 2023-24 tax year, with HMRC collecting £829.2 billion, representing 94.7% of all tax due.

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”.

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She 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.”

But the figures show progress in personal tax collection, with 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.

HMRC said the combined share of the tax gap attributed to individuals and the wealthiest now accounts for just 10% of the overall.

Ms Griffin cautioned: “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.”

The figures come amid a storm of controversy surrounding HMRC amid worries over its customer service and falling public confidence in the tax system.

HMRC was also recently victim to a phishing scam, which saw £49 million lost and tens of thousands of tax accounts breached.

James Murray, Exchequer Secretary to the Treasury, said: “Every pound of tax uncollected puts a greater burden on honest taxpayers and deprives our public services of vital funding.

“In our first year in office, we have set out plans to raise an extra £7.5 billion through the most ambitious ever package to close the tax gap.

“We are determined to go further and faster to make sure everyone pays their fair share.”