HMRC targets SMEs to close the tax gap

One of the greatest challenges faced by HM Revenue and Customs (HMRC) is closing the tax gap – the difference between the amount of tax owed and collected.

In the last, it is believed that around five per cent, or £46.8 billion, of tax was left uncollected.

HMRC have locked onto what it believes to be one of the biggest offenders in not paying the tax that they owe – SMEs.

Are SMEs going to be targeted by HMRC?

In the 2023/24 fiscal year, 40 per cent of the Corporation Tax owed by SMEs was left unpaid.

This equated to SMEs paying only £22 billion of the £36.7 billion that was owed, leaving a staggering £14.7 billion of unclaimed tax.

Unsurprisingly, as the Government looks to fund the June 2025 Spending Review, such a large amount of unpaid tax is not going to be left alone for long.

While it might not be possible to fully close the tax gap, the Government believes it can raise an extra £7.5 billion by awarding HMRC £1.7 billion to fund an additional 5,500 compliance and 2,400 debt management staff.

Why are SMEs such big contributors to the tax gap?

While there are plenty of SMEs that do pay their taxes, there are a worrying number that seem to either not pay them at all or not pay them in full.

A sense of confusion around the tax system could be a contributing factor behind the missing tax, and some SMEs lack the resources and support to achieve accurate financial record-keeping.

Digital reporting should work to address this, but many SMEs are slow to make the change as digital solutions are seen as expensive or complicated.

When Making Tax Digital (MTD) for Income Tax is mandatory, micro businesses, sole traders, and landlords will have less of an excuse for erroneous filings, as it will be harder for their finances to slip under the radar.

It is unlikely that the same will be true for larger SMEs as the rollout of MTD for Corporation Tax has been scrapped.

The current system will only form part of the solution, thus necessitating an expansion of HMRC’s operations.

One thing that is certain is that SMEs are now a target for tax compliance, so they will be operating under enhanced scrutiny for the foreseeable future to prevent the tax gap from widening.

Don’t risk being caught out by HMRC’s tax gap crackdown! Stay compliant by speaking to our team of tax specialists.