Small businesses are responsible for £20bn of unpaid tax, according to new figures from HMRC.
HMRC has reported that the tax gap, which is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid, has risen by 5% to £35.8bn.
However, the tax gap percentage has remained consistent with last year's revised estimate of 4.8% of theoretical tax liabilities.
The majority of the tax gap now lands at the door of small businesses. According to the figures, small businesses' contribution towards the tax gap has risen over the last five years from 40% in 2017/18 to its current figure of 56%.
In comparison, the share of the tax gap for mid-sized and large businesses fell from 18% in 2017/18 to 11% in 2021/22, while the contribution attributed to the wealthy and individuals accounts for between 9% to 13% of the overall tax gap in each of the last five years.
The release of the figures puts the spotlight back on small businesses and signals a shift in HMRC's attention back on this group.
Steven Porter, partner and head of tax disputes and investigations at law firm Pinsent Masons, said HMRC had recently been focused on large businesses and wealthy individuals, with investigations taking longer to complete, but based on these figures, "Small businesses that aren't tax compliant should not be surprised if they are investigated by HMRC over the next couple of years."
MTD and the tax gap
Closing the tax gap was one of HMRC's justifications for pressing ahead with Making Tax Digital, noting that the project would "make it easier for taxpayers to get their tax right first time" and "help reduce the scope for error".
Last year, HMRC released research that claimed Making Tax Digital is achieving its objective of closing the tax gap by reducing the number of errors made when filing tax returns.
Small businesses are being highlighted as the worst offenders and this could be seen as further proof that Making Tax Digital for income tax self-assessment (MTD ITSA) could reduce these ‘errors'.
However, as John Barnett, the chair of CIOT's technical policy and oversight committee, pointed out: "On the face of it the pandemic has not had a significant effect on the tax gap, and nor has the introduction of Making Tax Digital. The figures suggest HMRC are still collecting about 95% of tax due, which compares well internationally."
Rise in errors and carelessness
The tax gap figures come three years after digital record keeping and quarterly reporting for VAT was introduced.
The figures show that the tax gap for VAT has fallen from a peak of 14.4% in the tax year 2008-09, which was blamed on the recession, to 5.4% or £7.6bn in absolute terms.
While the VAT tax gap has fallen since the introduction of MTD for VAT, failure to take reasonable care and error actually increased - with these being key arguments for the digital project.
According to HMRC figures, a failure to take reasonable care accounted for a tax gap of £10.7bn, and represented 30% of the customer behaviour tax gap. This has increased from 26% in the 2020/21 tax year, while error accounted for £5.4bn, which increased from 14% in the previous tax year to 15%.
"The findings in this report illustrate the complexity of the tax system. More than £16bn of the tax gap relates to taxpayers not getting things right through what HMRC categorise as error or a failure to take reasonable care, and both figures are rising," said Barnett.
The tax gaps for income tax, National Insurance contributions and capital gains decreased from 4.5% in 2005/06 to 3.0% in 2021/22, whereas the corporation tax gap increased from 11.4% in 2005/06 to 13.3%.
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