HMRC report the 2024/25 Tax Gap has risen to 6.4 percent

Tax gap by type of tax

The figures below have been sourced from HMRC’s estimates published on 23 June 2026. The percentage figures are the percentage share of the total tax gap.

With income tax continuing to be a significant source of lost tax revenue, HMRC will no doubt hope that the continued rollout of Making Tax Digital (MTD) will help to combat this. Included within the Government’s package of tax gap measures announced at the 2025 Budget – worth an estimated £10 billion in additional revenue by 2029/30 – was the introduction of mandatory VAT e-invoicing. The impact of this measure on VAT’s sizeable contribution to the overall tax gap will be interesting to monitor, albeit it is not scheduled to be implemented until April 2029.

Corporation tax gap

However, HMRC’s prime concern will likely continue to be the contribution of corporation tax to the overall tax gap and, in particular, the role played by small businesses, as detailed below. The percentage figures are the percentage share of the total tax gap.

Small businesses continue to be the largest contributor to the corporation tax gap: in fact, they are by far the largest contributor to the total tax gap.

The corporation tax gap for small businesses, when looked at as a percentage of theoretical corporation tax liability, is estimated at 44.6 percent in 2024/25, a marginal increase from 44.5 percent in 2023/24. Since reporting began in 2005/06, the small business corporation tax gap declined, until 2011/12 where it bottomed out at 9.2 percent. Since then, it has risen with particularly marked increases between 2018/19 and 2021/22.

However, this year’s tax gap report notes there is emerging evidence that the small business corporation tax gap may have been understated prior to 2019 and 2020. This reflects improvements since 2019 to 2020 in how compliance activity is undertaken and recorded, resulting in more complete identification of non-compliance in recent years. As a result, estimates before and after 2019 to 2020 may not be directly comparable.

In addition, HMRC report that over half (55 percent) of small businesses submitted incorrect corporation tax returns with an under-declared tax liability in 2022/23.

HMRC have identified two predominant risks contributing to the tax gap in the small company population: under-reported income and overclaimed expenses, and error and evasion in transactions occurring between a company and its owners. Concerns around the latter of these risks has led HMRC to recently consult on modernising the framework on reporting payments by close companies to participators.

Tax Gap by behaviour

With the hope that the rollout of MTD will help to reduce the high prevalence of failure to take reasonable care, HMRC have recently turned their attention to the contribution of legal interpretation uncertainties to the tax gap. In this respect, a consultation on expanding the scope of the Uncertain Tax Treatment regime has recently been held, although this regime focusses on large businesses. HMRC’s Guidelines for Compliance 13 (GfC13), requiring taxpayers to choose an interpretation that they believe is most likely correct in cases of uncertainty, may help here.

Final thoughts

HMRC’s Transformation Roadmap, published in July 2025, made clear that closing the tax gap remains a key objective for the Government. Given the broad trend of a growing tax gap over the past decade and tight fiscal headroom, it is unsurprising that the current Government’s first two fiscal events have included a raft of tax gap measures. Arguably, it is too soon to gauge the effectiveness of these measures based on the 2024/25 data; but ministers will no doubt feel pressure to show progress by the time next year’s data is published.

For further information please contact:

• Sharon Baynham
• Stefanie Redmond