The ‘tax gap’ in the United Kingdom currently stands at a rather eye-watering £33bn. The tax gap, for anyone unfamiliar with the term, quite simply means ‘unpaid tax’. It’s the figure that Her Majesty’s Revenue and Custom is owed but has not been paid. So the government and economy are owed £33 BILLION by debtors. Most of which they will never see.
Who owes the money, though? Joe Bloggs? Huge multinational conglomerates? Or SMEs and the like? Well, it’s a little of all of them. The worrying news is that the percentage amount owed to the HMRC by small businesses is on the rise. It now stands at 41% of the overall tax gap. That’s a whopping £13.7bn, almost double the £7bn figure owed by what the HMRC classify as ‘large businesses’.
A large majority of the tax gap comes from a failure to pay income tax, national insurance contributions and capital gains tax. In fact, that figure amounts to a total of £13.5bn alone. Unpaid VAT accounts for £11.7bn of the tax gap, with corporate tax responsible for £3.5bn.
What are the reasons behind the tax gap? Well, of course, non payment is up there, but it only accounts for approximately £3.5bn of the debt. The rest is driven by a combination of other factors including:
- Failure to take reasonable care (£5.9bn)
- Criminal acts (£5.4bn)
- Tax evasion (£5.3bn)
- Legal interpretation (£5.3bn)
- Error (£3.2bn)
- The ‘hidden economy’ (£3.2bn)
- Tax avoidance (£1.7bn)
Mel Stride is the Financial Secretary to the Treasury and he says this about the news:
“These really positive figures show that the tax gap is the lowest in the last five years, which reflects the hard work that HMRC and I have been doing to ensure we support businesses to pay the right tax at the right time and clamp down on tax evasion and avoidance.”
“Collecting taxes is essential for funding our vital public services such as the NHS – indeed, had the tax gap remained at its 2005/06 level the UK would have lost £71 billion in revenue destined for public services, enough to build 200 hospitals.”
It's a positive spin, certainly.
HMRC’s Chief Executive Jon Thompson was quick to remind us all how Britain is the only country in the world that regularly publishes its tax gap in some detail, in a bid to be open and fully transparent.
“I am pleased that the downward trend shows HMRC and HM Treasury’s continued hard work to tackle evasion and avoidance is working,” he said.
But others were only too happy to notes the serious issues and express concern. Brian Palmer, a Tax Policy Adviser at the Association of Accounting Technicians (AAT), points out that much more work needs to be done on the subject with SMEs.
“Given big-name cases of recent years, the public might be surprised on first glance that SMEs are the biggest contributors to the tax gap. But, of course, large firms have the professional and financial expertise to ensure they are correctly paying the taxes they owe – not a penny less, crucially, but also not a penny more."
“With the growth in cloud accounting software, it will be easier for smaller firms to concentrate on running their businesses, store their records digitally and thus be well equipped to meet tax compliance requirements. As a result of this and Making Tax Digital, their tax information, and most likely their overall finances, should be far more accurate.”
It may come as a surprise to many to find that SMEs are so central to the tax gap, especially given the focus on unpaid and avoided corporation tax. But let’s not conflate the two. Small businesses are not shirking their tax responsibilities. They’re just struggling to pay…
And it’s a big concern.
If you run a small company and are concerned about your ability to meet your tax obligations, contact us today. We can help.