The UK tax gap has reached a record high of £39.8 billion, according to the latest figures from HMRC.

In its ‘Measuring tax gaps 2024’ report, HMRC has revealed its estimates for the difference between the amount of tax it should, in theory, receive for the 2022-2023 tax year – and what it actually gets.

And while the cash amount for the tax gap has increased, the percentage of total unpaid theoretical tax liabilities has dropped to 4.8%.

Here, I scrutinise the figures, give my reaction to the report and share my advice for taxpayers.

What does the HMRC tax gap report reveal?

The main findings are:

  • The UK tax gap is estimated to be 4.8% of total theoretical tax liabilities of £823.8 billion for 2022-2023 – or £39.8bn in absolute terms. That means HMRC collected 95.2% of all tax due.
  • The gap has reduced from 7.4% in 2005-2006 to 4.8% in 2022-2023.
  • The corporation tax gap grew from 11.4% in 2005-2006 to 13.9% (£13.7bn) in 2022-2023.
  • The gap for income tax, National Insurance contributions (NICs) and capital gains tax (CGT) dropped from 4.5% in 2005-2006 to 3% (£13.7bn) in 2022-2023.
  • The inheritance tax (IHT) gap has grown from 3% in 2005-2006 to 4.4% (£300m) in 2022-2023.
  • The VAT tax gap dropped from 13.7% in 2005-2006 to 4.9% (£8.1bn) in 2022-2023.
  • The largest components of the tax gap by tax type are the corporation tax gap, and the income tax, NICs and CGT gap, both at a 34% share, followed by the VAT gap with a 20% share.
  • Small businesses are the biggest part of the 2022-2023 tax gap by customer group at a 60% share.

(Note: the figures are HMRC’s best estimates at the time of publication. Tax gap estimates are uncertain and subject to revision.)

In its report, HMRC said the percentage tax gap takes into account the effects of inflation, economic growth and changes to tax rates, whereas the cash figure doesn’t.

It said the absolute value of the tax gap had grown by 23% from £32.4bn in 2005-2006 to £39.8bn in 2022-2023. However, total theoretical tax liabilities had increased by 88% from £437.6bn in 2005-2006 to £823.8bn in 2022-2023.

Tax gap by customer group

  • The share of the tax gap attributed to small businesses has increased over the last five years, from 44% in 2018-2019 to 60% in 2022-2023.
  • For large businesses, the share has fallen from 15% in 2018-2019 to 11% in 2022-2023.
  • Mid-sized businesses account for 11% of the overall tax gap in 2022-2023.
  • The portion due to criminals has fallen from 15% in 2018-2019 to 9% in 2022-2023.
  • And the combined share of the tax gaps for wealthy customers and individuals accounts for 9% in 2022-2023.

Tax gap by behaviour

  • Failure to take reasonable care accounts for the largest proportion of the tax gap in 2022-2023 at 30% (£12bn), increasing its share from 25% in 2019-2020.
  • Error and evasion account for the second and third largest parts at 15% (£5.8bn) and 14% (£5.5bn) respectively of the overall tax gap in 2022-2023.
  • The proportion of the tax gap due to criminal attacks reduced from 13% in 2019-2020 to 9% (£3.5bn) in 2022-2023.
  • The share of the gap by legal interpretation fell from 12% in 2019-2020 to 10% (£3.9bn) in 2022-2023.
  • Non-payment increased from 11% in 2019-2020 to 13% (£5.2bn) for 2022-2023.
  • Avoidance stands at 4% (£1.8bn), and hidden economy is around 5% (£2.2bn).

My reaction to the tax gap figures

There will always be people who deliberately avoid paying their taxes.

But one of the biggest contributing factors to non-compliance is the sheer complexity of the tax system. It’s challenging for tax experts and HMRC themselves, so it’s no wonder many people get things wrong or don’t understand all their compliance obligations.

In times of hardship, companies may attempt to minimise their accountancy fees by dealing with more of their tax affairs in-house. But that will inevitably lead to mistakes, especially as it can be frustratingly difficult to speak to staff at HMRC for guidance.

This is a perfect storm, and it’s not surprising the tax gap is at a record high in cash terms.

My advice for taxpayers

It may be tempting to cut costs by carrying out your routine compliance yourself, but this can be false economy.

If HMRC discovers mistakes, you could face a long, drawn-out investigation and potentially bills for extra tax, interest – and even fines.

Most taxpayers find the HMRC enquiry process stressful. So, it’s important to work with your accountant or tax adviser to prevent unnecessary shortcuts being taken that might result in painful enquiries.

Tax compliance isn’t ‘sexy’ and is often neglected. But you shouldn’t dismiss routine compliance tasks as unimportant. That’s because the consequences of failing to pay your taxes or making mistakes can be disastrous.

Get your taxes right

At Churchill Taxation, our team has built a reputation for supporting people and businesses to manage their tax affairs.

Find out how we can help you by calling 07813 434195 or emailing stephanie.churchill@churchilltaxation.co.uk

Steph Churchill

Stephanie Churchill

Managing director & co-owner of Churchill Taxation