Tax gap widens to £59.2bn

The UK tax gap has widened to £59.2bn, with HMRC’s latest official statistics showing that 6.4% of total theoretical tax liabilities went unpaid in the 2024 to 2025 tax year.

HMRC said it collected 93.6% of all tax due, with total theoretical tax liabilities estimated at £924.4bn. The latest tax gap compares with a revised 6% for 2023 to 2024 and remains below the 7.5% level recorded in 2005 to 2006, although HMRC cautions that recent years include projections and that estimates should be interpreted as a long term compliance indicator.

Small businesses accounted for 62% of the tax gap in 2024 to 2025, up from 58% in 2020 to 2021. Large businesses accounted for around 12%, mid-sized businesses 7%, wealthy individuals 6%, individuals 4%, and criminals 8%.

The largest components by tax type were corporation tax and income tax, National Insurance contributions, and capital gains tax, each accounting for 35% of the overall gap. VAT accounted for 20%. HMRC said the corporation tax gap had increased to 18.1% in 2024 to 2025, partly reflecting a step change in 2019 to 2020 linked to data improvements.

The department also said there is emerging evidence that the small business corporation tax gap may have been understated before 2019 to 2020. Development work is under way to improve the historic series in future publications.

The figures give sharper context to the government’s compliance agenda. Ministers have announced measures intended to raise an additional £10bn a year by 2029 to 2030, while HMRC has been developing digital reporting, structured data, earlier transaction visibility, and targeted compliance activity.

The small business share is the central policy issue. Small companies and unincorporated businesses make up a large and diverse population, ranging from highly sophisticated operators to owner managed companies with limited finance capacity. Errors, carelessness, weak records, informal withdrawals, cashflow strain, complexity, and deliberate evasion can all appear in the same statistical category, making enforcement difficult to target cleanly.

One part of that challenge is the boundary between company and owner finances. HMRC targets director loan reporting gap examined proposals for closer reporting of transactions between close companies and participators. The latest tax gap data shows why HMRC wants more granular information from small and owner managed businesses.

Digital tax administration is another part of the response. Making Tax Digital for Income Tax is already changing the rhythm of accounting work, with quarterly updates replacing a purely annual compliance cycle for affected taxpayers. MTD deadline leaves accountants with practical gaps highlighted concerns around workflow, client approvals, HMRC calculations, and the first August filing deadline.

The new tax gap figures suggest that digitisation alone will not be enough. HMRC’s own analysis treats the tax gap as a measure of compliance across behaviours, customer groups, and tax types. Some non-compliance is caused by error or failure to take reasonable care. Some arises from avoidance, evasion, hidden economy activity, criminal attacks, or legal interpretation. A single enforcement tool cannot address all of those drivers.

Finance teams and advisers should expect continued compliance intervention. Companies are likely to see more data requests, more targeted checks, and more pressure to maintain contemporaneous records. Areas involving corporation tax, VAT, director loans, payroll, self assessment, and digital records are likely to remain under scrutiny because they connect to both the largest tax types and the small business gap.

The statistics also carry a fiscal dimension. The government’s room for manoeuvre depends partly on whether HMRC can improve collection without relying entirely on headline tax rises. A wider tax gap increases pressure to show that existing liabilities are being collected fairly, particularly when public finances remain tight.

There is also a balance to strike. Heavy handed compliance can add cost and anxiety for companies that are trying to comply. Weak enforcement can undermine confidence in the system and place more burden on compliant taxpayers. The next phase of HMRC reform will be judged by whether it can distinguish between error, complexity, poor systems, and deliberate non-compliance with greater precision.

The headline figure is large, but the structure of the gap is just as important. HMRC is seeking earlier visibility and more data driven compliance because retrospective checks are expensive, slow, and imperfect. Businesses with weak records are likely to feel that shift first.