HMRC’s Measuring Tax Gaps 2023–24: What Small Businesses Need to Know 📊
1. The UK Tax Gap at a Glance 📉
The latest HMRC tax gap figures arrive in the report Measuring Tax Gaps 2023–24. In fiscal 2023–24, the tax gap percentage fell slightly to 5.3 % – still a staggering £46.8 billion tax gap left uncollected by HM Revenue & Customs (HMRC).
| Year | Total UK tax due | Tax gap | Change vs prior year |
|---|---|---|---|
| 2022–23 (revised) | £836 bn | 5.6 % | – |
| 2023–24 | £882 bn | 5.3 % | ▼ 0.3 pp |
Supporting evidence: According to the National Audit Office (NAO) and HMRC annual report, much of the loss arises from error & carelessness rather than outright deliberate tax evasion. The behavioural tax factors breakdown:
| Cause of non‑payment | Share of gap | Example |
| Failure to take care | 31 % | Missing a figure when filing a VAT return |
| Careless tax mistakes / error-based non‑compliance | 15 % | Using the wrong Corporation Tax rate in your accounts |
| Deliberate evasion / avoidance | 14 % | Using offshore structures or phoenix companies |
Key takeaway: A large portion of the gap is accidental. Better tax record keeping, digital bookkeeping software, and accounting apps can markedly improve compliance.
2. Why Small Businesses (SMEs) Dominate the Gap 🏢
Small business non‑compliance now accounts for 60 % of the total gap.
Small company Corporation Tax is the sore spot: £36.7 bn owed; £14.7 bn (≈ 40.1 %) remains unpaid Corporation Tax – the largest corporation tax shortfall on record.
Value Added Tax (VAT) and Income Tax gap figures also show SMEs struggling with VAT return obligations, Self Assessment deadlines, and National Insurance contributions paperwork.
Why the strain?
Tax system complexity – constant Spring Statement 2025, Autumn Budget 2024, and HM Treasury statements introduce new reliefs, rates, and anti‑avoidance rules.
Cash‑flow tax planning pressures – micro‑businesses and sole traders often juggle quarterly VAT, annual Corporation Tax due date, and monthly PAYE at once.
Skills gap – many have no dedicated finance director small business or tax planning adviser on staff.
Industry impact: The Federation of Small Businesses (FSB) estimates compliance now costs SMEs £25 billion and 240 million hours a year. That is time not spent on growth, innovation, or customer service.
3. Policy Response and Compliance Crackdown 🚨
The UK Government and Chancellor of the Exchequer have unveiled a robust HMRC policy response:
| Investment line | Amount | Goal | Implementation status |
| Compliance staff recruitment | £1.7 bn (2024–28) | Hire 5,500 HMRC compliance staff | In progress (first cohort Q4 2025) |
| Debt‑management officers | Part of £1.7 bn | 2,400 extra staff | Recruitment ads live |
| Digital tools budget | £500 m | Upgrade digital tax accounts, AI‑driven audit triggers, and analytics | Beta roll‑outs mid‑2026 |
Headline metric: HMRC expects this spending to raise £7.5 billion extra revenue annually by 2029–30 through higher compliance yield and faster HMRC debt recovery.
What does that mean for you?
HMRC audit risk will rise. The bolstered HMRC audit unit is focusing on limited companies, partnerships, and sole traders with repeated late filings or sudden quarterly tax summaries swings.
Letters, phone calls, and HMRC tax investigations will become more frequent, especially where behavioural tax factors suggest careless tax mistakes.
Expect stricter stances on payment plans HMRC and fewer deadline extensions.
4. Making Tax Digital (MTD): The Digital Road Ahead 💻
Making Tax Digital (MTD) remains the centrepiece of HMRC’s plan for change (government strategy).
| Stream | Start date | Status | Expected yield |
| MTD for VAT | 2019 (all VAT‑registered firms) | Live | £4 bn by 2029–30 |
| MTD for ITSA | April 2026 (income > £50k) | Deferred but confirmed | £1.95 bn by 2029–30 |
| MTD for Corporation Tax | Consultations ongoing | Pilot 2027 | TBD |
Benefits for SMEs
Digital bookkeeping → fewer unintentional tax errors
Automated checks enhance tax return accuracy and help avoid HMRC penalties
One dashboard for interim financial reports, end‑of‑period statements, and secure HMRC agent authorisation
Action point: Adopt accounting software UK, integrate tax software with your bank feeds, and schedule Self Assessment and VAT filings early.
5. Real‑World Examples & Calculations 🧮
Example 1 – Corporation Tax gap
Scenario: A small limited company made £120,000 profit in 2023–24. The correct Corporation Tax rate is 25 %.
| Step | Calculation | Amount |
| Tax due | £120,000 × 25 % | £30,000 |
| If owner forgets £12,000 of revenue | Tax due on declared £108,000 = £27,000 | Tax gap: £3,000 |
| Penalty (careless) | up to 30 % of gap | £900 |
| Total risk | £3,900 + late‑payment interest | – |
Example 2 – VAT error
Quarterly sales: £60,000 (VAT‑inclusive). Correct net = £50,000; VAT = £10,000.
Filing mistake (records £45,000 net) means VAT remitted = £9,000.
VAT gap on that return = £1,000 + interest + possible 15 % surcharge.
Small errors compound: five similar quarters create a £5,000 unpaid VAT exposure – a red flag for HMRC enforcement actions.
6. Compliance Checklist for Small Businesses ✅
| Task | Frequency | Why it matters |
| Reconcile bank feeds with invoices via business bookkeeping apps | Weekly | Boost financial record accuracy |
| Run quarterly tax summaries & cash‑flow forecasts | Quarterly | Plan funds for VAT, PAYE, Corporation Tax |
| Review expense policies to avoid tax avoidance schemes | Annually | Keep within rules, claim correct business tax relief claims |
| Confirm tax deadlines UK and set alerts | Ongoing | Self Assessment deadline = 31 Jan; VAT quarters 1 m later; Corporation Tax due date = 9 m + 1 d after year‑end |
| Conduct a mock HMRC audit risk self‑review | Yearly | Identify HMRC audit triggers before HMRC does |
| Seek proactive tax advice from your accountant | Twice‑yearly | Align with 2024 Budget tax plans, HMRC spending review, etc. |
7. Frequently Asked Questions ❓
Q1. What is the difference between error vs evasion tax?
Error or failure to take care involves careless tax mistakes without intent. Deliberate evasion is intentional. Penalties range from 0–30 % (error) up to 100 % (evasion) of the unpaid amount.
Q2. How can I reduce my HMRC audit risk?
Maintain digital bookkeeping, respond promptly to HMRC customer services letters, and use a trusted tax return preparer.
Q3. Are payment plans HMRC still available?
Yes. For cash‑flow stress you can set a Time‑To‑Pay plan, but earlier contact means better terms.
Q4. Where can I claim R&D tax credits?
Through the online HMRC tax gap methodology portal. Ensure accurate calculations to avoid tax avoidance structures accusations.
Q5. Does MTD apply to wealthy individuals with property income?
Yes – from April 2026 if income > £50k; helps address the wealthy individual tax gap.
8. Next Steps & How MA & CO Accountants Can Help 🤝
Visit our Home page for an overview of our SME tax support packages.
Explore dedicated services – from limited company compliance to Self Assessment regime assistance.
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Final Word 🚀
The new HMRC compliance investment signals the most significant tax compliance crackdown in years. By upgrading to digital tax accounts, staying ahead of MTD for VAT and MTD for ITSA, and seeking proactive tax advice, you can avoid the trap of unpaid Corporation Tax, sidestep costly tax investigations, and focus on building a thriving business.
Stay compliant, stay informed – MA & CO Accountants are here to navigate every step.
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