HMRC's Small Business Tax Collapse: When the Revenue Collector Can't Collect Revenue

What they claim: HMRC is “working closely with small businesses” while the government promises “the most ambitious ever package to close the tax gap” and make “everyone pay their fair share.”

What actually happened: The reality is that HMRC has lost institutional control of small business revenue, with 40% of corporation tax now going uncollected—a £14.7bn capitulation that represents the basic failure of state capacity to enforce its own laws.

Uncomfortable Reality

The numbers are stark and getting worse. In 2023-24, small businesses failed to pay £14.7bn of the £36.7bn corporation tax they owed—a 40.1% non-payment rate that represents complete systemic failure. This isn’t a minor administrative hiccup; it’s the revenue collection equivalent of a dam burst.

More damning still: this represents a deterioration from £12.3bn unpaid in the previous period. While HMRC claims overall progress on the “tax gap,” the agency has demonstrably lost control of the business sector that comprises 99% of UK companies.

The institutional decay becomes clearer when viewed over time. In 2019-20, small businesses accounted for less than half of the UK’s total tax gap across all levies. By 2023-24, this had grown to 60%—a mathematical demonstration of an enforcement system in retreat.

Accountability Vacuum

Dan Neidle from Tax Policy Associates captured the institutional failure precisely: “HMRC has done an impressive job reducing the large company tax gap in the last 20 years. But they seem to have lost control of the small company tax gap.”

This observation reveals something profound about how power operates in modern Britain. HMRC can successfully extract compliance from large corporations—entities with dedicated tax departments, legal teams, and reputational concerns. But faced with millions of small businesses, the system simply surrenders.

The Federation of Small Businesses points to the obvious: companies find the tax system “too complicated” and HMRC “unresponsive.” Yet this has been true for decades. What’s changed is HMRC’s capacity to function as an effective institution.

Enforcement Charade

Treasury minister James Murray’s response demonstrates the rhetorical vacuum where policy should exist: “Every pound of tax uncollected puts a greater burden on honest taxpayers and deprives our public services of vital funding.” This states the problem while offering no explanation for why it’s getting worse.

The government’s solution—£1.7bn over four years for 5,500 compliance and 2,400 debt management staff—reveals the bureaucratic mindset driving decline. Rather than questioning why the current system generates 40% non-compliance, the response is simply to hire more people to operate the same broken processes.

Wealthy Exception

Perhaps most revealing is HMRC’s claim that wealthy individuals “made up the lowest proportion of the tax gap” at just 5%. This statistical sleight of hand occurs while the National Audit Office warns that HMRC likely underestimates wealthy tax avoidance.

As Caitlin Boswell from Tax Justice UK observes: “Evidence suggests that the level of tax non-compliance among the super-rich is far higher than estimated, with eye-watering sums of hoarded wealth being held offshore and out of sight of HMRC.”

This creates a perverse reality: HMRC appears incapable of collecting straightforward corporation tax from corner shops and plumbers, while simultaneously claiming the super-wealthy are models of tax compliance. It suggests an enforcement system that has given up on both ends of the scale—too overwhelmed by volume to handle small businesses, too under-resourced to pursue the wealthy.

Implications

This isn’t simply about tax collection—it’s about the basic capacity to govern. If the state cannot extract the revenue it legally requires from the businesses within its jurisdiction, what does this say about institutional competence?

The pattern fits broader themes of UK decline: systems that once functioned adequately now buckle under basic operational demands. Whether it’s processing visa applications, maintaining infrastructure, or apparently collecting taxes, the consistent thread is institutional incapacity masked by bureaucratic expansion.

The small business tax gap also demonstrates how compliance becomes voluntary when enforcement becomes ineffective. With a 40% non-payment rate, rational economic actors quickly learn that tax obligations are essentially suggestions.

The Compound Effect

While politicians debate tax policy in Westminster, businesses across Britain are conducting their own referendum on HMRC’s competence—and voting with their calculators. Each business that successfully avoids tax creates precedent and incentive for others to follow.

Meanwhile, the genuinely compliant businesses—those 60% still paying what they owe—subsidise both the non-compliant and the expanding bureaucracy tasked with chasing them. This creates exactly the wrong incentives: punishment for compliance, rewards for evasion, and expansion for institutional failure.

Reality Check

HMRC’s £829.2bn total collection figure obscures a fundamental question: how much more should have been collected if the system functioned competently? With small businesses alone avoiding £14.7bn, and likely underestimation of wealthy non-compliance, the actual revenue loss may exceed the official £46.8bn “tax gap” significantly.

This represents not just missing money, but missing state capacity. Every pound uncollected is also evidence that the basic governmental function of taxation—upon which everything else depends—is degrading in real time.

The government’s promise to raise an extra £7.5bn through “the most ambitious ever package to close the tax gap” becomes hollow when viewed against an expanding gap among the businesses supposedly easiest to monitor and collect from.

Diagnosis

What emerges is a picture of an institution that has lost the basic competence to perform its core function. HMRC can process payroll taxes automatically deducted from employment, collect VAT from large retailers, and pursue high-profile tax cases that generate headlines. But faced with the bread-and-butter work of collecting corporation tax from millions of small businesses, it has effectively capitulated.

This institutional failure cascades through the entire tax system. When 40% non-compliance becomes normalised for small businesses, it undermines the voluntary compliance that underpins all taxation. When the state demonstrates it cannot enforce its own revenue requirements, it signals broader governmental incapacity.

The result is a system that increasingly resembles taxation by consent rather than law—functional for those who choose to participate, irrelevant for those who opt out, and apparently powerless to bridge the gap.