At a glance
- The small business tax gap is now the UK’s largest – and it’s growing.
- HMRC says 40% of small business corporation tax goes unpaid.
- Most of the gap comes from taxpayer error, not deliberate evasion.
- HMRC is bringing in extra staff and technology to increase scrutiny.
Each year tax authorities in many OECD nations try to calculate their tax gaps. These are the differences between theoretical tax liabilities and the amounts that authorities actually collect from different types of taxes and taxpayers. As HMRC openly declares, the calculations are far from perfect.* But over the past two decades there are reasons to think the tax gap estimate has grown more reliable.
And when you read HMRC’s 2025 annual report, you cannot avoid its statements of determination to close the UK’s tax gap. The department calls closing the tax gap its official “Strategic Objective 1”. And the term “tax gap” occurs almost 100 times in the document.
The government clearly agrees. Its June 2025 spending review gave HMRC £1.7 billion over four years to hire new compliance and debt management staff – almost 8,000 of them. HM Treasury expects a substantial return on that money – £7.5bn a year in extra tax by 2029-30.
Who will receive the brunt of the extra scrutiny? It seems likely that most of the new compliance staff will focus on small business** cases.
That’s in part because of a startling statistic: HMRC now estimates that fully 40% of the corporation tax due from small businesses is not being paid.
The small business gap moves the wrong way
HMRC has set out publicly the reasons why the small business tax take will receive attention over 2025 and 2026.
Most pieces of the tax gap have contracted over the past two decades. The tax gap for large companies, for instance, is estimated to have shrunk significantly, due in part to closer scrutiny, international co-operation and new laws.
“If HMRC had closed the small business tax gap as effectively as it closed other tax gaps… it would collect £15 billion more each year.”
Dan Neidle, Founder, Tax Policy Associates
But HMRC estimates of the small business sector’s tax gap*** have moved the other way. Assuming HMRC’s estimates are broadly correct, the small business tax gap is by far the largest component of the UK’s overall tax gap. And small businesses’ corporation tax shortfall has made corporation tax the single biggest contributor to the UK’s overall tax gap.
Rise of the corporate tax gap
HMRC’s 2025 annual report makes the point itself, in an included analysis by the Comptroller and Auditor General. “The proportion of the tax gap for which small businesses are liable remains higher than for any other customer group,” that analysis says. It also says that the small business gap makes up 60% of the UK’s corporation tax gap in 2023-24, the latest year for which we have estimates. That 60% is up from 56% in 2022-23 and 48% in 2019-20, it adds.
Awareness of this growth in the small business tax gap has begun to seep out into the wider debate. In early 2025, The Economist – hardly a bastion of wild-eyed anti-capitalist rhetoric – published an article titled “Britain is becoming a well-mannered but deceitful society”. The magazine used this as the evidence for a claim that many UK businesses “seem to be dodging taxes”.
It’s worth noting that HMRC doesn’t see most of the small business tax gap as the result of attempted tax-dodging. It credits better detection techniques for much of the increase in the small business tax gap, rather than worsening behaviour. And it calculates outright tax evasion made up just 14% of the small business tax gap in 2023-24. The biggest causes? Taxpayer carelessness and errors, which together made up 45% of the gap.
Tax gap numbers
HMRC tax collection 2023-24, all taxes
- Estimated total tax due: £876.0bn
- Estimated small business tax due: £36.7bn
- Tax collected: £829.2bn
- Small business tax collected: £22.0bn
- Estimated total tax gap: £46.8bn (5.3% of total tax due)
- Estimated small business tax gap: £14.7bn (40.1% of small business tax due)
Source: HMRC
But if most of the small business tax gap isn’t down to outright evasion, that still leaves a disturbing reality: if HMRC estimates are right, then the tax gap is far bigger for small businesses than for other sectors.
Has HMRC lost control?
Dan Neidle runs Tax Policy Associates, a respected not-for-profit group that aims to help Britons understand this country’s tax and legal policy. He was previously a top-rated tax lawyer, as head of tax for multinational law firm Clifford Chance. In a June 2025 analysis, Neidle argues that HMRC’s own numbers show it has “lost control of small business tax”.
Neidle’s key point is that the small business tax gap is not closing the way other tax gaps are. “If HMRC had closed the small business tax gap as effectively as it closed other tax gaps,” he writes, “it would collect £15 billion more each year.”
He also notes another curious element: the problem seems to be spreading across more of the small business sector. “HMRC data shows that well over a third of small businesses now underpay their tax by more than £1,000 – a doubling since 2018/19.”
What has changed?
That leaves a couple of unanswered questions. The first question is why the small business tax gap is so big.
Neidle notes that small business has long had a relatively high corporation tax gap. But he also argues that in the past few years, “something has changed”. And he reasons that the pandemic is unlikely to be the sole cause.
“That sharp uptick in 2019/20 may have initially been caused by the pandemic, but we don’t see that effect for other types of taxpayer,” he writes. “[A]nd it’s now clear that the trend didn’t slow down after the pandemic.”
Different analysts have different explanations: the tax system’s complexity, HMRC’s responsiveness to phone calls, HMRC understaffing, inadequate training, and more. Neidle, for instance, argues that falling HMRC customer service levels play a role. He also believes that “much of the growing small business tax gap is driven by remuneration tax avoidance schemes”.
Next: IT, AI and data-gathering
The second question is how HMRC will try to shrink the small business tax gap.
The government has given HMRC more funds. Meanwhile, HMRC itself has also announced it will not, for the moment, extend its Making Tax Digital system to corporation tax. Instead, it says it will work at creating a system suited to “the varying needs of the diverse [corporation tax] population”. It will invest in “its people, services, standards and technology” (including those 7,900 new staff) and will spend more on IT, data-gathering and artificial intelligence.
In September, HMRC’s director general for customer strategy and tax design, Jonathan Athow told a government committee that improved software could help. He suggested it could provide businesses with “real-time nudges” via software. “We are very keen to go down that route,” he added.
An HMRC spokesperson tells Financial Accountant that “we’re working closely with small businesses to provide improved services that help them pay the right tax first time, while tackling those who deliberately bend the rules.
For many small businesses and their accountants, the persistence of the small business tax gap suggests a new era of digital scrutiny.
* The tax gap calculations require HMRC to estimate the total taxes that Britons theoretically owe, a number that’s hard to be certain about.
** HMRC defines “small businesses” as companies with turnover below £10mn and fewer than 20 employees.
*** The overall small business tax gap includes both corporation tax and other taxes, such as VAT.
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