Image: “HM Revenue & Customs” by Howard Lake is licensed under CC BY-SA 2.0
The tax gap remains one of the clearest indicators of where the UK’s tax system is under strain, and HMRC’s latest figures highlight how patterns of non-compliance are shifting.
The tax gap is the estimated difference between the amount of tax that should, in theory, be paid and what is actually collected. It reflects both deliberate evasion and unintentional error, and helps HMRC identify where enforcement efforts and support are most needed.
Following last month’s release of detailed statistics on the UK tax gap up to 2022-23, the five charts below help illustrate how the gap has shifted over time – and where signs of pressure are starting to emerge.
How does the current tax gap compare to previous years?
The latest estimates, based on data from 2022-23, put the UK tax gap at £39.8 billion, equivalent to 4.8% of total tax owed.
While this is the largest tax gap ever recorded in absolute terms – up from £38.1 billion in 2021-22 – the tax gap has actually fallen as a proportion of liabilities. That proportion is now at its lowest level since records started in 2005-06.
This reflects a significant rise in both projected and collected tax revenues following the disruptions of the COVID-19 pandemic.
Labour’s first budget announced their commitment to additional funding to close the tax gap. This will include employing 5000 additional compliance staff and simplifying HMRC’s services to make digital self-service tax management easier for individuals and businesses.
Staying ahead of digital tax compliance and helping clients reduce preventable errors will be critical as HMRC steps up targeted checks on areas it considers high risk.
Tax gap by type of tax
HMRC’s breakdowns of the tax gap by tax type reveal how the composition of the gap is shifting, and where new pressure points are emerging.
Corporation tax has seen a significant increase in its share of the tax gap, rising from 17% in 2018-19 to 34% in 2022-23 – now on par with income tax (IT), National Insurance contributions (NICs) and capital gains tax (CGT).
This increase highlights growing challenges in taxing corporate profits, influenced by factors like profit-shifting by multinationals, the increasing complexity of tax compliance and time lags in enforcement or collection during the pandemic era.
Meanwhile, declining gaps in VAT and excise duties could reflect some successful digital transformation and enforcement strategies.
This suggests business taxation may become the next major frontier for enforcement and policy reform. For financial advisers, this is a cue to review the strength of documentation, governance and audit trails – especially for clients making complex claims or operating across jurisdictions.
Most of the tax gap relates to small businesses
Small businesses remain the largest contributors to the tax gap by a wide margin.
In 2022-23, they accounted for £24.1 billion, over 60% of the total gap. This compares with just £4.3 billion for large businesses and similar figures for mid-sized firms.
HMRC’s breakdown of the types of behaviour contributing to the tax gap suggests that the majority of tax loss from small businesses – and other taxpayers – mostly relates to error and failure to take reasonable care rather than evasion.
This underlines the importance of foundational compliance: understanding what qualifies as reasonable care, interpreting complex tax rules accurately and ensuring clients don’t unintentionally drift into non-compliance.
As HMRC invests further in automation and risk profiling, errors that may have previously gone unnoticed are more likely to trigger prompts, investigations or penalties.
For accountants, this also presents an opportunity. The shift toward mandatory digitisation means better access to real-time data and tools that can flag issues earlier – such as miscategorised expenses, missed VAT adjustments or inconsistent income reporting.
Continued understanding of the shape and source of the tax gap is essential for anticipating where scrutiny is likely to fall – and ensuring that clients are prepared.
By incorporating these insights into regular workflows and client conversations, accountants can better identify areas of risk, adjust their advice accordingly and help clients stay on the right side of evolving compliance expectations.
Find more information on IFA’s Tax series here.
