Watch out for the gaps: small businesses bear the brunt of the tax deficit

Introduction

It appears that small businesses may be causing a tax deficit, with a recent problem of Age of Accounting 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, is the difference between the taxes actually collected by HMRC and the notional debt, i.e. what should have been collected in an ideal scenario.

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

Why this increase?

Several factors appear to have contributed to this increase:

• Complexity of the tax system: As we know, navigating the complex web of tax law can be a difficult task for many small businesses.
• Deterioration of service standards at HMRC: falling service standards within HMRC’s HMRC services have made the problem worse.
• Limited support for small businesses: Linked to the second point, many small business owners feel that they are largely left to their own devices, without adequate advice from HMRC and/or relevant agencies.

Of the different taxes, corporation tax appears to present the biggest challenge, followed by VAT and self-assessment. These include taxes which are collected less frequently and, in the case of corporation tax, which are less ‘automated’ than 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 mistakes to deliberate fraud. However, there is growing concern that many small businesses are not filing returns, not out of malice or ignorance, but because they cannot pay the taxes due and want to somewhat hands in the sand. This problem reflects broader economic challenges and the growing tax burden on small businesses.

The broader tax environment

The latest figures from HMRC show a near doubling of tax receipts, from £437.6 billion in 2005-06 to £823.8 billion in 2022-23. This high tax environment exacerbates the pressure on small businesses, already struggling with economic uncertainty and the consequences of the pandemic.

As a small business owner, I find corporate tax to be the most unfair tax. While income tax is more progressive, all businesses making more than £50,000 in profits must pay corporation tax of 25% (with marginal rate relief available between £50,000 and £250,000) . This means that small businesses like mine face the same tax rate as large multinational corporations, a situation that many, including me, find unfair.

Looking forward

With Labor now taking charge, the small business community will be watching closely to see if they prioritize their needs. What do you think? Do you have hope?

Need help?

If you are a small business owner struggling with your tax affairs or looking to optimize your tax situation, ETC tax can provide you with the support you need.