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It probably comes as little surprise to those reading this but small businesses in the UK are the country’s worst tax offenders, owing an estimated fourteen billion pounds in tax!

The total amount of uncollected tax has hit £35bn and it’s these smaller companies which are responsible for the greatest part of the tax gap. The figure crept up by £2bn in the past year and rocketed a staggering £5bn since 2017.

With 40% of the gap being attributable to small businesses, which taxes remain unpaid?

  1. PAYE

Accounts for £600,000 – with 13% of small companies breaking PAYE rules. This figure used to be much higher with nearly a third failing to comply but the whole situation has been tightened up with the introduction of real-time information (RTI) reporting in 2013.

    1. Income Tax, NI contributions (NIC) and CGT

      Accounts for £12.9bn, by far the biggest area of tax evasion!

    2. VAT

      Accounts for £12.5bn although HMRC is hoping that this will fall with the roll-out of Making Tax Digital (MTD) which, from April this year requires all VAT registered businesses turning over more than £85,000 to submit their returns through a recognised piece of software such as Xero or Quickbooks.

    3. Corporation Tax

      Accounts for £5.2bn of the tax gap. At 8.5% of the tax evaded HMRC do claim that this has actually fallen from 12.5% in 2005-6, just before the financial crisis although in real terms this would have been just £3.5bn – percentages, percentages!

    4. Legal Interpretation

      Accounts for legal representation for HMRC.

      Jason Piper is head of taxation at ACCA:

      “While the corporation tax gap has reduced from 12.5% to 8.1% in 2017-18 in a little more than 10 years, the biggest single taxpayer group responsible for the tax gap is small businesses, costing society nearly twice as much as big business.”

      The lower tax bills faced by smaller businesses mean that HMRC has to open many more enquiries for the amount of tax evaded compared to large firms. Jason adds:

      “it is vital that HMRC remains sensitive in managing SME relationships every bit as carefully as they do multinationals.’

      James Hender is head of private wealth at Saffery Champness:

      “there remains a general shortfall in tax knowledge, particularly in small businesses which are unlikely to have professional tax teams and may not always be able to afford advice.”

      This means of course that in some cases innocent errors are being made as well as a fair amount of carelessness. These errors account for £9bn of the unpaid tax!

      Finally, the fact that £1bn is spent in court cases representing HMRC shows that “courts are frequently correcting HMRC’s view of the law and are taking the taxpayer’s side” according to Hender. Something that must give all small businesses who find themselves in trouble by fair means or foul a lot of hope!

      Further Reading: https://www.kinsellatax.co.uk/12-ways-hmrc-can-find-out-if-are-a-tax-evader/