Why the UK corporation tax gap is rising – and how businesses can stay compliant

HMRC’s latest data reveals that the UK corporation tax gap has reached a record £18.6 billion, driven largely by small-business non-compliance. As scrutiny intensifies, companies must strengthen tax governance to remain compliant and avoid costly penalties.

The UK corporation tax gap has widened sharply, drawing the attention of both HM Revenue & Customs (HMRC) and the business community. HMRC’s latest figures show the difference between what companies were expected to pay in Corporation Tax and what was actually paid has reached £18.6 billion for the 2023 to 2024 tax year, equivalent to 15.8 per cent of the theoretical liability. With small businesses responsible for the majority of this shortfall, HMRC is expected to intensify its compliance activity, making it essential for companies to understand what drives the gap and how they can stay ahead of enforcement.

What HMRC’s figures reveal

Released in June, HMRC’s annual data on the corporation tax gap revealed that Corporation Tax now represents almost half of Britain’s total £46.8 billion tax gap. The figures break down by company size as follows:

Small businesses recorded the largest disparity, with a 40.1 per cent gap amounting to £14.7 billion. Mid-sized businesses showed a 6.0 per cent gap worth £1.5 billion, while large companies accounted for a 4.2 per cent gap or £2.3 billion in lost revenue.

The findings highlight that small businesses continue to pose the greatest compliance challenge, contributing around 60 per cent of the total corporation tax gap, a marked increase from 48 per cent in 2019-20. The National Audit Office (NAO), previously noted that HMRC lacked an effective strategic response to the rise in small-business tax evasion, suggesting that limited resources and complex reporting obligations have created an environment where non-compliance can thrive.

Why the corporation tax gap is growing

Several factors underpin the widening UK corporation tax gap. Many smaller companies face mounting administrative and reporting burdens while navigating complex tax rules, particularly as Making Tax Digital and other compliance requirements evolve. Some may struggle with record-keeping or understanding allowable deductions, while others may adopt aggressive or mistaken tax positions in an attempt to manage cash flow.

HMRC, meanwhile, faces its own pressures. Despite investing in digital infrastructure and data analytics, the agency’s enforcement capacity remains stretched. Where gaps emerge, compliance interventions tend to lag behind, creating the perception that some businesses can take risks without consequence.

The Treasury has made clear that compliance spending pays dividends, estimating that every £1 invested in compliance yields £22 in additional tax revenue. This means that businesses can expect a sharper compliance focus in the months ahead, with targeted reviews and data-driven audits aimed particularly at smaller enterprises.

How businesses can stay compliant

Businesses that act early are best placed to manage risk and demonstrate good tax governance. This begins with accurate record-keeping and consistent review of Corporation Tax computations. Companies should ensure that their accounting software integrates smoothly with HMRC’s digital systems and that they understand how recent tax changes affect their obligations.

Many businesses are now placing greater emphasis on forward-looking compliance strategies rather than reactive measures. The focus has shifted towards establishing clear documentation, maintaining accurate submissions, and aligning accounting systems with HMRC’s digital platforms, a proactive approach that not only strengthens governance but also significantly reduces the risk of investigation.

At Rayner Essex, our specialists support clients through tailored corporation tax compliance and advisory services, helping businesses identify risk areas and adopt practical solutions. We also advise on strategic tax planning, Making Tax Digital, and ongoing compliance support to ensure clients remain fully aligned with HMRC requirements.

By embedding compliance into everyday operations, businesses can avoid the costly consequences of under-declaration and safeguard their reputation.

The outlook for the year ahead

The widening UK corporation tax gap signals a period of renewed scrutiny and reform. For HMRC, the challenge will be balancing digital transformation with effective enforcement. For businesses, the focus must be on building resilient tax controls that stand up to examination.

Those that take a proactive approach, supported by experienced advisers will be best positioned to remain compliant, mitigate risk, and demonstrate good governance. As the compliance landscape continues to evolve, the ability to evidence transparency and accuracy in tax reporting will become a defining marker of trust and professionalism.

How Rayner Essex can help

A strong tax governance framework is now vital for any business that wants to stay compliant and avoid unnecessary risk. At Rayner Essex, we help companies establish clear processes, improve reporting accuracy and strengthen their readiness for HMRC scrutiny.

If you would like tailored guidance on your Corporation Tax position or support with improving compliance, you can learn more through our corporate tax services page.