Spotlight on small businesses and high net worth individuals as HMRC mind the gap

HMRC have recently unveiled their most recent tax gap figures, covering the period up to the end of the tax year ending on 5 April 2024.  In simple terms, the tax gap is HMRC’s way of estimating the disparity between the tax actually collected and the tax that they estimate should have been collected. The statistics show that the overall tax gap is estimated at 5.3% of total theoretical tax liabilities, equating to £46.8 billion. This represents a slight decrease from the previous year's figure of 5.6%, but overall, since 2017/18, the tax gap has remained relatively stable, averaging around 5.5%.  However, this overarching stability masks considerable variations across the different taxes and types of taxpayer.

The most eye-opening statistic relates to small businesses (defined by HMRC as businesses with a turnover below £10 million and typically fewer than 20 employees).  HMRC’s latest figures show that small businesses account for a huge 60% of the total tax gap; and, incredibly, 40% of all corporation tax apparently due from small businesses was not paid.  There may be a number of reasons for this – for example, it seems that a significant proportion of tax avoidance schemes are concentrated within this sector.  The decline in local HMRC offices may also make it harder for HMRC officers to pick up on localised non-compliance in the way they would once have done.  In any case, we can expect a heightened focus on compliance activity in the small business sector going forward, in particular given the recent increased focus on tax collection and compliance, as evidenced in the package of measures announced in the Chancellor’s Spring Statement in April, which was specifically designed to close the tax gap.

At the other end of the tax gap spectrum are high net worth individuals (HNWIs) (referred to by HMRC as “wealthy individuals”). HNWIs constitute only 5% of the tax gap, a figure which has remained relatively stable across recent years. However, campaign groups have already raised concerns, suggesting that the actual amount of tax missed from HNWIs may be significantly higher than reported. Verifying such claims is necessarily challenging but in any case it seems doubtful that HMRC will view the latest figures as a reason to relax their approach to HNWIs.  Recent years have seen an increased HMRC focus on investigating the affairs of HNWI taxpayers, particularly those with offshore interests. HMRC will no doubt be aware that, from a resource perspective alone, collecting more tax from this group of taxpayers on average should require fewer enquiries than other sectors.  Specific measures targeted at this sector were also contained in the Spring Statement, with, for example, HMRC announcing that they would be overhauling their approach to offshore tax non-compliance by recruiting experts in private sector wealth management and deploying AI and advanced analytics to help target those trying to hide their wealth.   

Overall, then, the latest tax gap figures make for interesting reading.  The precise impact in practice remains to be seen, but, particularly when combined with the recent Spring Statement proposals, we would not be surprised to see a real uptick in HMRC enquiries over the coming years.