UK tax gap reaches a record £59.2 billion – what does it mean for small businesses?

HMRC's latest estimates put the UK tax gap for 2024/25 at a record £59.2 billion, with small businesses accounting for a significant proportion of the total.

With HMRC continuing to focus on tax compliance and record-keeping, the figures are a useful reminder of the importance of getting tax returns and business records right.

What is the tax gap?

The tax gap is the difference between the amount of tax that should theoretically be paid to HMRC and the amount that is actually collected.

For 2024/25, HMRC estimates that the tax gap was approximately 6.4% of the total tax due.

Although the percentage has been higher historically, it has generally increased over recent years. For comparison, the estimated tax gap for 2021/22 was 5.7%.

Small businesses account for the largest share

Small businesses accounted for around 62% of the tax gap in 2024/25, an increase of four percentage points compared with 2020/21.

HMRC also estimates that around 45% of the Corporation Tax due from small businesses was not collected.

The figures help to explain why HMRC continues to place considerable emphasis on small-business compliance.

Errors and poor record-keeping matter

Importantly, the tax gap is not simply caused by deliberate tax evasion.

HMRC estimates that 35% of the tax gap – nearly £21 billion – arises from a failure to take reasonable care.

This can include carelessness, mistakes and inadequate record-keeping.

When taxpayer errors are included as well, more than half of the tax gap relates to taxpayers who may otherwise consider themselves compliant.

By comparison, HMRC estimates that tax evasion accounts for 12% of the tax gap and tax avoidance for just 1%.

What does this mean for businesses?

Good accounting records have always been important, but the increasing focus on the tax gap means businesses should expect HMRC to continue investing in compliance activity.

Keeping complete and accurate records, using suitable accounting software and obtaining advice where the tax treatment of a transaction is unclear can considerably reduce the risk of mistakes.

It is also important to correct errors promptly if they are identified.

‍Contact us

Please contact us to find out how the above applies in your circumstances and how we can help you.

Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.