£59bn tax gap exposes broken system, not Britain’s entrepreneurs

Britain’s £59.2 billion tax gap has sparked fresh scrutiny of small businesses, which HMRC says account for the largest share of unpaid tax. But the figures tell a more complicated story than simple tax avoidance. For millions of founders, the real problem is a tax system that has become so complex that honest mistakes are almost

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inevitable. With constant rule changes, multiple reporting regimes and ever-growing compliance demands, many entrepreneurs say they’re spending more time navigating tax than running their businesses. If ministers want to collect more revenue, the answer may not be tougher enforcement—but a tax system ordinary business owners can actually understand.

SMALL BUSINESSES AREN’T DODGING TAX : THE SYSTEM’S THE PROBLEM

£59.2bn tax shortfall exposes a system so complex even HMRC says it’s unworkable

The Government is staring at a £59.2 billion black hole in unpaid taxes and small businesses are being blamed for almost two‑thirds of it.

Small business owners aren’t tax dodgers. They’re overwhelmed by a system so complicated and disproportionate that even HMRC admits people can’t get it right.

THE TAX GAP: SMALL BUSINESSES CARRY THE BLAME

HMRC’s latest figures show:

• £865.2bn collected in 2024–25

• 6.4% “tax gap” is the difference between what should be paid and what actually is

• 62% of that gap comes from small businesses

That’s the biggest share of any group and more than the shortfall caused by large companies> It’s also bigger than wealthy individuals and criminal activity.

However small businesses aren’t the artful ‘dodgers’. This isn’t down to fraud, or evasion or avoidance schemes. Some of it is down to what the HMRC calls “failure to take reasonable care” which is just a polite way of saying the system is so complicated that normal people make mistakes.

SMALL BUSINESSES ARE SET UP TO FAIL

The biggest driver of unpaid tax is carelessness and confusion caused by complexity, not deliberate wrongdoing. The system causes admin overload, and the rules change faster than founders can keep up which exacerbates the problem.

Simple mistakes, wrong boxes ticked, misunderstood guidance and software issues all add up to errors. These are the kind of errors that happen when you’re juggling customers, staff, suppliers and cashflow at 11pm. The system has grown like topsy with bolt-ons and add-ons and extensions and exemptions and hard-pressed small business owners can’t keep up.

The corporation tax “gap” has jumped to 18.1% which is a sure sign that the system is now so tangled that even accountants struggle.

This isn’t a compliance problem. It’s a design problem.

FIX THE SYSTEM, NOT THE FOUNDERS

We need to make the system proportionate for small businesses instead of imposing a one-size-fits-all system meant for big businesses on everyone. If small businesses can get it right first time and pay up the boost to the economy would be significant. Stop making the rules harder and start making them usable.

MEANWHILE, THE WEALTHIEST OWE £3.6BN

HMRC’s figures also show:

• The UK’s wealthiest individuals failed to pay £3.6bn last year

• That’s more than any other group of individuals

• Yet small businesses are still treated as the main problem

Founders are being squeezed from every direction:

• higher National Insurance

• higher National Living Wage

• rising costs

• late payments

• and now the blame for a £59bn tax gap

All while the super‑rich slip through the cracks.

THE TAX SYSTEM WAS BUILT FOR BIG BUSINESS, NOT SMALL

Small and micro businesses face:

• multiple tax regimes

• constant rule changes

• complex digital reporting

• inconsistent guidance

• penalties for honest mistakes

• and no dedicated support

It’s no wonder errors happen. It’s no wonder the tax gap is growing. And it’s no wonder founders feel like the system is stacked against them.

SIMPLIFICATION IS NOW A BUSINESS SURVIVAL ISSUE

A simpler tax system would mean fewer mistakes and penalties with less admin and more time to run the business. More accurate payments mean less work for HMRC and more revenue collected without raising taxes. It’s a win-win.

This isn’t about letting anyone off. It’s about designing a system that normal humans can use. It’s been tried before and the powers that be failed in that endeavour. We need to try again and this time include small and micro business owners in the design and implementation of a modern proportionate system. The £59.2bn tax gap isn’t a story about non‑compliance. It’s a story about complexity, confusion and a system that’s outgrown the people it’s supposed to serve. If the Government wants more tax paid, it doesn’t need more penalties. It needs simplicity.