London, UK – A concerning report from Tax Policy Associates reveals a troubling trend in the UK’s small business sector: 40% of corporation tax due from small businesses remains unpaid. Despite a significant reduction in the overall tax gap over the past nineteen years, this latest analysis of HMRC data indicates that the agency has lost control over this particular segment.
The tax gap, which is the difference between the taxes that should be collected and what is actually collected by HMRC, has seen a two-thirds reduction overall, marking a notable achievement. However, the small business tax gap has widened significantly during the COVID-19 pandemic and has shown no signs of decreasing since.
The failure to address this gap effectively means a staggering £15 billion in potential tax revenue is not being collected annually. This shortfall is particularly concerning at a time when government resources are stretched thin due to various economic pressures.
Michael Wilkinson, who engaged in an online discussion regarding this issue, highlighted potential reasons for this gap, suggesting that some of it may be due to HMRC’s misinterpretation of tax laws. He pointed to numerous cases where HMRC has allegedly misclassified accountants of small independent businesses as Managed Service Company Providers, despite evidence to the contrary. These disputed cases, covering tax years ending 2018 to 2020, reportedly involve around £200 million in tax demands deemed incorrect.
As HMRC grapples with this challenge, there is a growing call for the agency to refine its approach and enhance its efforts to recover these unpaid taxes, thereby bolstering the nation’s fiscal health.
