Mind the Gap: Small Businesses Bear the Brunt of the Tax Shortfall

Introduction

It appears that small businesses may be the source of a tax shortfall, with a recent issue of Accountancy Age highlighting that around 60% of the UK's tax gap for 2022-23 was attributed to small businesses.

The tax gap, for those who don’t know, represents the difference between taxes actually collected by HMRC and the theoretical liability i.e. what should have been collected in an ideal scenario.

The figure marks an increase from 59% in 2021-22 and a significant jump from 44% in 2018-19, according to recently released data.

Why the Increase?

Several factors appear to have contributed to the rise:

• Complexity of the tax system: as we are aware, navigating the intricate web of tax legislation can be overwhelming for many small businesses.
• Deteriorating service standards at HMRC: declining service standards within HMRC services from HMRC have made the problem worse..
• Limited Support for small business customers: linked to the second point, many small business owners feel that they are largely left to their own devices without adequate guidance from HMRC and/or relevant bodies.

Among the various taxes, corporation tax seems to present the greatest challenge, followed by VAT and self-assessment. Notably, these are the taxes which are collected less frequently and in the case of corporation tax are less “automated” when compared to PAYE for example, potentially contributing to the tax gap.

The Reality for Small Businesses

The tax gap encompasses various forms of non-compliance, from innocent errors to deliberate fraud. However, there's a growing concern that many small businesses are failing to file returns, not out of malice or ignorance, but because they can't afford the taxes owed and wish to bury their hands in the sand somewhat. This issue reflects broader economic challenges and the increasing tax burden on small business.

The Broader Tax Environment

HMRC's latest figures indicate a near doubling of tax revenues, from £437.6 billion in 2005-06 to £823.8 billion in 2022-23. This high tax environment exacerbates the pressure on small businesses who are already grappling with economic uncertainty and the hangover from the pandemic.

As a small business owner myself I find corporation tax  the most unfair tax. Whereas income tax is more progressive, all businesses earning over £50k in profit must pay 25% corporation tax, (albeit with marginal rate relief available between £50k and £250k). This means that small businesses such as my own, face the same tax rate as large multinational corporations, a situation that I know many, including me, find inequitable.

Looking Ahead

With Labour now taking the helm, the small business community will be keenly watching to see if they will prioritise their needs. What do you think? Do you have hope?

Need Help?

If you're a small business owner struggling with your tax affairs or seeking to optimise your tax position, ETC Tax can provide the support you need.