New information released shows that small businesses are responsible for the largest part of the tax gap – owing HMRC £14 billion
The tax gap – the difference between what is expected to be received and what is actually received by HMRC – stands at £35 billion, which is a large increase from the £30 billion owing just two years ago. Small businesses account for £14 billion of the total, or 40%. The shortfall is down to tax evasion (illegal), tax avoidance (legal) or genuine errors.
Given that HMRC has spent a lot of time and effort over the last few years on making settlements, offering amnesties and a clampdown aggressive tax avoidance schemes, this result is quite shocking.
The tax gap for small business largely arises from failing to take proper care, the wrong interpretation of tax rules or accounting errors – deliberate or otherwise.
The introduction of Real Time Information (RTI) reporting for payroll in April 2013 seems to be working well though. Only £600k of the £14 billion is unpaid PAYE, and only 13% of businesses are not complying with payroll rules, when it was 33% just five years ago.
Personal tax – income tax, national insurance and capital gains tax – has now overtaken VAT as the most evaded tax, with £12.9 billion undeclared. VAT accounts for £12.5 billion of the gap, but HMRC are expecting this to fall significantly as the newly rolled Making Tax Digital (MTD) scheme starts to take effect and reduce errors.
HMRC believes that there is £1 billion of tax owing from ‘ghosts’ – those totally unknown to HMRC, and a further £900 million owing from ‘moonlighters’ – those that have at least one source of undeclared income.
The fact that small businesses account for such a disproportionate amount of the tax gap shows just how important it is to stay on top of your numbers and seek professional advice when you are out of your depth. The larger businesses will have in house finance teams and accountants, as well as the latest software to help them ensure that they are getting their taxes correct.
Small businesses should dedicate time and effort to ensure that they are getting things correct as the fines and penalties HMRC can impose for getting things wrong can be very severe.