We always need to be wary of any statistics coming out of HMRC these days. With this in mind, a recent article in AccountingWeb got us thinking about how small business owners may be unwittingly paying the wrong amount of tax. Might your business be paying an incorrect amount of tax? If you are at all worried, your local Accountants in St Albans could help with this.
What facts has HMRC released to illustrate the tax gap?
HMRC has today released the figures of the 2022 to 2023 tax gap, which is their calculation of the tax due, but not collected. The tax gap is estimated to be 4.8% of total theoretical tax liabilities, meaning that HMRC collected 95.2% of all tax due.
The percentage remains consistent with the last couple of year’s estimates. However, the amount has risen from £35.8bn to £39bn. While the overall total percentage uncollected hasn’t changed, the tax gap from small businesses has actually increased.
According to the figures, small businesses are responsible for £24.1bn (60%) of the tax gap by customer group, meaning they're responsible for the lion’s share of the theoretical unpaid tax. In comparison, wealthy customers and individuals only account for 5% each.
Uncollected tax from small business has increased over recent years
The amount landing at the door of small businesses has increased in the past few years from 44% of the overall tax gap in 2018 to 2019. Last year, the share of the tax gap attributable to small businesses was 56%.
As a comparison to other ‘customer’ groups:
- Mid-sized businesses account for 11% of the overall tax gap in 2022 to 2023.
- Large businesses have fallen from 15% of the overall tax gap in 2018 to 2019 to 11% in 2022 to 2023.
- The combined share of the tax gaps attributed to wealthy customers and individuals accounts for 9% of the overall tax gap in 2022 to 2023.
- The amount attributed to criminals has fallen from 15% of the overall tax gap in 2018 to 2019 to 9% in 2022 to 2023.
John Barnett, chair of CIOT’s technical policy and oversight committee, said: “While large businesses and wealthy individuals are often accused of not paying enough tax these figures suggest that their total share of the tax gap is only a quarter of that of small businesses."
Given failure to take reasonable care and error make up nearly half of the overall tax gap, it is reasonable to surmise that a lot of this is due to small business owners making mistakes with their tax. We make it a priority at Visionary Accountants to educate and help small business owners to understand their tax obligations better.
Our Accountants are researching and studying the tax gap to ensure that our local clients in St Albans, Watford and Welwyn Garden City are fully informed and don't get caught out by the HMRC coming knocking. By staying ahead of the curve, we can provide proactive advice and strategies to mitigate risks associated with tax errors and non-compliance. Our goal is to safeguard our clients from unexpected tax liabilities and potential penalties, ensuring that their businesses can thrive without the burden of unforeseen tax issues.
Tax gap estimates
HMRC has also estimated the value of the tax gap by each type of tax in 2022 to 2023:
- Corporation tax is 13.9% of the theoretical liability, or £13.7bn in absolute terms - no change from the previous year
- Income tax, national insurance contributions and capital gains tax is 3.0% of the theoretical liability, or £13.7bn in absolute terms
- VAT is estimated to be 4.9% of theoretical liability, or £8.1bn in absolute terms - no change from the previous period.
Avoidance
The tax gap has played a pivotal part in the economic plans of all the major parties during the general election campaign.
The Conservative Party said in its manifesto that it plans on raising £6bn a year through tackling tax avoidance and evasion, while the Labour Party matched the same amount in its manifesto saying it will target “large businesses and the wealthy” as part of its plans to close the tax gap.
The tax gap statistics give whichever party gets the overall majority in the election some clues as to where they should look first if they want to reduce the tax gap and clamp down on tax avoidance.
Avoidance is the smallest proportion of the tax gap at 4%. Half of the avoidance tax gap, is attributed to corporation tax at a value of £1bn. This figure has increased from £0.8bn in 2021-22 and £0.7bn in 2020-21.
The next largest share of the avoidance tax gap is £0.5bn in income tax, national insurance and capital gains tax. This figure has remained the same since 2019-20.
The rest of the estimated £1.8bn of the avoidance tax gap is made up from £0.1bn in ‘other taxes’ and £0.1bn in VAT.
Carelessness
In a guide to the tax gap published ahead of today’s announcement, the Chartered Institute of Tax (CIOT) explained that £11bn of the tax gap is a result of evasion or other illegal activity, but the largest contributor to the tax gap - responsible for over £17.8bn of it - is taxpayer mistakes (categorised as error and carelessness).
The CIOT said the increase in tax lost to taxpayer error and carelessness could be due to a number of factors from the increasing complexity of the tax system to worse HMRC customer service and the inadequacy of published guidance or even changes in how the tax gap is calculated. Meanwhile, evasion and avoidance accounted for £7.3bn.
It is very much evident that poor service provision and communication from HMRC post-pandemic combined with cost-cutting by small business owners in an inflationary environment has contributed to this.
Beyond the July General Election
All political parties talk of raising funds by tackling tax avoidance and evasion but HMRC’s estimated figures appear to show that it is self assessment taxpayers, especially individuals and unincorporated businesses, failing to take reasonable care and making errors with their submissions that actually account for the largest proportion of the tax gap.
This being the case, it is evident that failure to engage professional service providers such as Visionary Accountants is a false economy. When underpaid tax is discovered by HMRC the final bill may include fines and interest. This will be on top of the additional costs of an investigation and can be disastrous for cash flow. Our advice? Engage a professional firm of local accountants and get your tax right first time.
How can your business avoid the tax gap trap?
Small businesses in St Albans and Watford may unwittingly pay the incorrect amount of tax due to the complexity of the tax system and the common mistakes that can occur in tax submissions. Visionary Accountants can help these businesses by providing expert advice and meticulous tax planning services, ensuring full compliance with HMRC regulations while taking advantage of all available allowances and deductions. This approach guarantees that businesses pay the minimal amount of tax legally permissible, avoiding the pitfalls of tax evasion and the costly consequences of HMRC investigations.
Need a tax gap trap assessment? Call 01727 730550 or use the form below to organise your free initial consultation.