Closing the tax gap: is your business ready for increased tax scrutiny?

With the latest tax gap report from HMRC highlighting the vast sums of tax going unpaid, it should come as no surprise that the Chancellor has pledged yet more resources to tackling tax evasion and avoidance. It’s also a strong reminder that all businesses – not just those seeking to subvert the rules – are coming under intense scrutiny.

What does this mean for businesses? In today’s environment, managing tax risks proactively, prioritising tax governance and mounting a firm response to legislation such as the Corporate Criminal Offence has never been more important.

Let’s look at this in more detail.

The tax gap is the difference between the amount of tax that should be paid to HMRC and what it actually receives. According to the latest report, which was published in June 2024 and focuses on the 2022-23 financial year, the estimated tax gap stands at £39.8 billion. This equates to 4.8% of total theoretical liabilities¹, which is a calculation of a theoretical value of tax that should be paid based on an estimated tax base.

Smaller businesses are the largest contributor by customer group, accounting for a 60% share while corporation tax and the combination of income tax, national insurance and capital gains tax contribute the most by tax type.

By taxpayer behaviour, failure to take reasonable care accounts for the largest chunk of the tax gap at 30%, another 15% is down to errors and a significant 14% is lost through tax evasion².

While the latest figures do show that the UK tax gap is declining – it was 7.4% in 2005-06 – it is still a sizeable sum for the Government to pursue. 
What’s more, a combination of additional resource, advanced technology and a much tougher regulatory landscape means that HMRC is becoming increasingly more effective at doing this.

The contribution to the tax gap from tax evasion demonstrates clearly why successive governments are focussed on tackling it. Central to this is the Corporate Criminal Offence (CCO), a key piece of legislation giving HMRC significant powers.

Introduced to address challenges faced by HMRC in holding businesses accountable for tax fraud – often because directors were too far-removed from wrongdoing – the CCO makes businesses criminally liable for failing to prevent anyone acting for or on behalf of them from facilitating tax evasion. It aims to place the onus on businesses to set appropriate preventative measures.

Although introduced back in 2017, many firms still haven’t responded adequately. This is concerning because the CCO applies to all businesses and can result in severe penalties including unlimited fines and regulatory sanctions.

During our recent webinar where representatives from HMRC joined us to discuss effective tax risk management, it was highlighted that, as of July 2024, 11 CCO investigations were live with many more in the pipeline. These involve businesses of varying sizes and from across different sectors. Crucially, HMRC has also said: "There are hundreds of cases we’ve reviewed and rejected – they might not be suitable for CCO, but action is still being taken."

While intentional tax evasion or avoidance grabs headlines, very often it’s the more mundane mistakes or lacklustre governance that open businesses up to HMRC scrutiny. It’s never enough to simply react to tax obligations and take action when risks or non-compliance surface.

All businesses are exposed to tax risks. The key is to acknowledge this and take proactive steps to identify those you face and manage them within the context of your business.

You can do this by:

• Conducting a tax risk review to understand the risks facing your business and assess their impact
• Establishing strong tax governance and a comprehensive risk and control framework to underpin tax compliance and reduce risk
• Developing proportionate risk-based prevention procedures
• Making use of technology where possible to automate processes, reduce the potential for errors and keep on top of obligations
• Monitoring tax risks regularly, reviewing processes and updating where relevant

By taking a proactive approach, you’ll:

• Identify risks early and position yourself to take action quickly
• Avoid spending unnecessary time and money dealing with inaccuracies or HMRC enquiries or investigations
• Demonstrate that you’ve got your house in order, which is reviewed by HMRC if you’re a larger business as part of a Business Risk Review but good practice for all businesses
• Avoid financial penalties and the reputational damage that comes with enquiries and conviction

There are significant commercial reasons too. Customers, suppliers and business partners increasingly seek to do business with those that can demonstrate strong governance and controls, particularly in relation to the CCO. This doesn’t just apply to large businesses; smaller firms can find themselves under more scrutiny, for example from larger suppliers they are dealing with.

Compliance with the CCO also comes up in due diligence when businesses are refinancing or looking to exit. A proactive approach to managing tax and other risks is naturally an expectation for private equity backed businesses.

Our experienced team can support you in identifying, assessing and managing your tax risks as well as compliance with the key governance regimes.

This includes:

• Conducting a comprehensive tax health check covering tax opportunities and risks across corporation tax, VAT and employment taxes
• Designing, documenting and implementing a tax risk and control framework to mitigate tax risks and underpin your tax compliance
• Implementing reasonable prevention procedures in response to the CCO and other governance regimes, including risk assessments, training and monitoring

Try our interactive risk and governance tool and receive a personalised score that evaluates the effectiveness of your tax risk management, including compliance with the CCO.

1. Tax gaps: Summary - GOV.UK
2. Tax gaps: Illustrative tax gap by behaviour - GOV.UK