The latest figures from HMRC estimate that the UK tax gap has increased by £400m to £46.8bn, as of June 2025. This means that HMRC estimates that £46.8bn (5.3%) of tax that should have been paid in the 2023/24 tax year, was not paid.
What do the numbers say?
The tax gap is a crucial measure of understanding tax compliance and represents the difference between the amount of tax that the government believes should have been paid to HMRC and what was actually collected. This can be measured from an HMRC customer base perspective, or from a tax perspective.
From a customer perspective, small businesses are liable for 60% of the estimated tax gap.
When looking at the level of outstanding liabilities from a tax type perspective, Corporation Tax is the single tax responsible for the largest part of the tax gap, making up 40% of estimated unpaid tax.
The data isn’t detailed enough to see how the different taxes apply to each type of HMRC customer.
How is HMRC tackling non-compliance?
The Autumn Budget announced a package of measures to address the tax gap, including investment to train and recruit 5,000 more compliance officers, while an additional 500 new staff were announced in the Spring. HMRC has since confirmed that additional staff will focus on tackling non-compliance amongst small businesses.
On that basis, we can reasonably expect HMRC to start undertaking more investigations into small businesses.
Consequences of an enquiry
Being the subject of an HMRC enquiry can be intrusive, obstructive and very costly to deal with. HMRC has various methods to select the target of an enquiry, however the important thing to remember is that no one is immune to a tax investigation – even companies and individuals confident of their compliance.
If HMRC does find that there is additional tax to pay, there will be interest on this tax and also potentially penalties. These penalties generally range up to 100% of the additional tax due (even more in certain offshore scenarios) and are influenced by HMRC’s view of the behaviour of the taxpayer.
HMRC has the ability to ‘name and shame’ deliberate defaulters, periodically publishing the names and addresses of people and businesses that have deliberately underpaid tax and failed to make a full disclosure to HMRC. This publication also includes the amount of tax and associated penalties. The most recent list was published in June 2025 and includes a variety of businesses and individuals from all different sectors.
What can businesses do to prepare in the increasing likelihood of tax investigation?
Firstly, you need to ensure you identify any compliance gaps in your business or personal tax affairs before HMRC opens an enquiry.
If HMRC launches an investigation into you or your business, the range of records and documents the inspector might check is vast. They’ll contact you or your accountant in advance to set out the evidence they want to see or information they are wanting to collect. This will likely include your annual HMRC tax returns, any PAYE records, tax you have paid, self-assessment returns, full company records or tax calculation evidence.
If you have any concerns regarding the compliance of your business, it is best to seek guidance and advice before HMRC gets in touch. However, for those who have already been contacted by HMRC regarding an investigation, our tax compliance team is here to support you throughout the process.
You might also wish to consider having an appropriate level of service protection in place, which can cover the costs of tax investigation fees. Our client HMRC Investigation Service cover ensures that the moment an enquiry letter arrives, a tax professional will deal with the enquiry on your behalf and your fees are covered.
If you would like tax advice and support for you and/or your business call 0808 144 5575 or email help@armstrongwatson.co.uk.
