Significant tax gap reinforces HMRC’s focus on compliance

HMRC has published its latest ‘Measuring Tax Gaps’ report, highlighting the continuing challenge of ensuring the right amount of tax is paid across the UK.

The latest estimates show the UK tax gap (the difference between the amount of tax that HMRC considers should be paid and the amount it actually collects) now stands at 6.4% of total theoretical tax liabilities, equivalent to £59.2 billion in the 2024–25 tax year.

The scale of the challenge remains significant

At £59.2 billion, the tax gap remains substantial and a key focus for HMRC and the government.

Although HMRC collected 93.6% of all tax due, the remaining gap reflects a significant loss of public revenue. The figures are likely to reinforce the government's continued emphasis on compliance, digitalisation and data-led enforcement as part of wider efforts to close the gap.

Where is the gap coming from?

The government data highlights several key themes:

• Small businesses remain the largest sector contributing to the gap, accounting for around 62% of the tax gap
• In terms of tax categories, Corporation Tax contributes around 35% of the gap, Income Tax, National Insurance and Capital Gains Tax collectively account for a similar proportion, and VAT continues to be a significant contributor
• A significant proportion of the gap is driven not by deliberate evasion, but by error, carelessness and a failure to take reasonable care

Importantly, HMRC believes the small business tax gap may have been underestimated in previous years, suggesting the challenge could be greater than earlier estimates indicated.

Much of the tax gap arises not from deliberate evasion, but from mistakes, misunderstandings and failures to take reasonable care – meaning even well-intentioned taxpayers can find themselves under HMRC scrutiny.

Implications for taxpayers

From our perspective, there are three important implications:

1. Greater HMRC activity

HMRC is continuing to invest heavily in compliance activity and data-driven enforcement. The department reported a record £48 billion of compliance yield in 2024–25 and the government expects compliance measures to generate an additional £10 billion annually by 2029–30 through increased resource, digital reforms and enhanced use of data.

2. Increased likelihood of enquiry

Investigations are not limited to high-risk cases. Enquiries may be opened on a random or targeted basis, even where records are well maintained.

Many HMRC interventions now begin with so-called 'nudge letters', where HMRC's data suggests there may be a discrepancy requiring review. While these are not formal investigations, they often indicate that HMRC already holds information it wants to reconcile and may be a precursor to further compliance activity.

3. Rising complexity and risk

As more businesses and individuals fall into Self Assessment or are impacted by changes such as Making Tax Digital, the risk of errors or misunderstandings increases. HMRC has also increased the level of detail that now needs to be included in Self Assessment returns relating to director shareholdings, providing additional data for compliance and review activity.

At the same time, HMRC is making greater use of third-party information and data-matching technology to identify inconsistencies and potential under-reporting. Information from employers, banks, investment providers, online platforms and overseas tax authorities can increasingly be cross-checked against tax return data, making discrepancies easier to identify.

Focus on accuracy

As risk-management measures, businesses and individuals should prioritise:

• Robust bookkeeping and accurate record keeping
• Early advice where tax treatments are uncertain
• Proactive review of tax positions before submission

Taking these steps can reduce the risk of enquiries and the associated disruption.

Key takeaway

The latest tax gap figures underline a clear message: HMRC's focus on compliance remains intense, and taxpayers can expect continued scrutiny.

With small businesses continuing to account for the majority of the tax gap, SMEs are likely to remain a key area of HMRC scrutiny.

While many instances of non-compliance arise from genuine mistakes rather than deliberate behaviour, the financial and administrative impact of an HMRC enquiry can still be significant. Taking proactive steps to improve record keeping, obtain professional advice and ensure compliance can help reduce both risk and disruption.

We’re here to help

If you have any questions on your tax position or risk exposure, get in touch with your usual Azets adviser or a member of our specialist team via the form below.

If Azets is your registered tax agent, you can also speak to us about our Tax Investigation Service, designed to provide financial protection and expert support in the event of an HMRC enquiry.

The service:

• Covers professional fees incurred in handling an HMRC investigation (subject to policy terms)
• Provides specialist representation to manage the process on your behalf
• Reduces stress and disruption by ensuring enquiries are handled efficiently and professionally

With HMRC continuing to invest in compliance activity and data-led enforcement, ensuring you have the right support and protection in place has never been more important.