Mind the (tax) gap – Why HMRC may have SMEs in its sights

The tax gap, the difference between the amount of tax owed and collected, has long been a thorn in HM Revenue and Customs’ (HMRC’s) side.

HMRC believe that last year, a total of £46.8 billion of tax was left uncollected, which equates to just over five per cent of the overall tax owed in the country.

Once again, SMEs have been identified as the largest contributors to the tax gap and inevitably are once again in the sights of the tax authority.

Why are SMEs being targeted by HMRC?

In the 2023/24 fiscal year, SMEs failed to pay 40 per cent of the Corporation Tax they owed, which meant that only £22 billion of the £36.7 billion owed was collected.

As the Government is currently trying to find the funds needed to make the June 2025 Spending Review possible, it is no wonder that the potential £14.7 billion of unclaimed tax has piqued its interest.

While it is unlikely to be able to recoup every penny, the Government plans to raise an extra £7.5 billion by closing the tax gap.

To achieve this, HMRC have been awarded £1.7 billion to fund an additional 5,500 compliance and 2,400 debt management staff.

Why don’t SMEs pay their taxes?

Plenty of SMEs do pay their taxes, but there is a valid concern over why so many seem not to.

Many of those responsible for operations in SMEs find the tax system confusing, or they may not have the resources or support to achieve accurate financial record-keeping.

A slow adoption of digital reporting can also be blamed in part for this, with some SMEs seeing digital solutions as expensive or complicated.

The enforcement of Making Tax Digital (MTD) for Income Tax may go some way to address the tax gap for micro businesses, sole traders and landlords, as it is going to be significantly harder for finances to slip through the cracks.

However, with the rollout of MTD for Corporation Tax some way off, this is only going to form part of the solution, which is why HMRC is expanding its operations.

With SMEs now firmly on the radar for tax compliance, we can expect further scrutiny to prevent the tax gap from growing any larger.

Do not get caught out by HMRC’s tax gap crackdown, speak to our team of tax specialists today to stay compliant!