Small businesses: Mind the Tax Gap
New figures released by HMRC in June 2023 reveal that small businesses are now responsible for 56% of the UK's 'tax gap', amounting to £20.2bn in a single year. This marks a continuous increase for the fourth year in a row, as small businesses were only accountable for 40% of the tax gap in 2017/18, totaling £12.8bn.
The tax gap is the difference between the amount of tax that should be paid to the government and the actual amount of tax collected via self assessment or corporation tax returns. It represents the tax revenue that is lost due to non-compliance, errors, and other factors by the taxpayer.
It is important for small businesses to be aware of the tax gap for several reasons:
Legal obligations: Small businesses have a legal obligation to comply with tax laws and regulations. Failing to do so can result in penalties, fines, and legal consequences.
Financial impact: The tax gap represents lost tax revenue for the government, which can lead to a higher tax burden on compliant taxpayers. This may result in increased tax rates or reduced public services, which can affect small businesses indirectly.
Reputation and trust: Engaging in tax avoidance or evasion practices can damage a business's reputation and erode trust among customers, suppliers, and partners. Maintaining a reputation for ethical business practices is crucial for long-term success.
Competitive advantage: Operating within the tax laws can provide small businesses with a competitive advantage. By accurately reporting and paying their taxes, they can demonstrate their commitment to transparency and integrity, which can attract customers and investors.
Avoiding penalties and scrutiny: Non-compliance with tax obligations can lead to penalties, investigations, and audits by HMRC. This can be time-consuming, costly, and disruptive to a small business's operations. By focusing on tax compliance, small businesses can avoid these issues.
Understanding and addressing the tax gap is important for small businesses to ensure compliance with tax laws, maintain their financial stability, protect their reputation, and gain a competitive edge in the marketplace.
Make sure you are operating compliantly as a small business
HMRC is increasingly focusing its attention on small businesses. While efforts have been made to reduce unpaid taxes from large businesses and high net worth individuals, there is still much work to be done in relation to SMEs.
Investigations into small businesses often take longer to complete, and issues can persist for years. Small businesses that are not tax compliant should anticipate potential investigations from HMRC in the coming years.
