The tax gap grows, and consultations on tax and business policies indicate potential changes for small businesses
Today we’re looking at Britain’s tax shortfall, and consider how consultations on tax and business policies could give a clue as to later changes for small businesses. Read on to find out more!
Small businesses account for two-thirds of Britain’s tax shortfall
The latest figures from HMRC reveal that the Treasury had a substantial £59.2 billion shortfall from unpaid taxes for the tax year 2024-2025. The ‘Measuring tax gaps 2026 edition’ found that the tax gap, which measures the difference between the amount of tax expected to be paid and what was actually collected, stood at an estimated 6.4%, up from 5.3% for 2023-24.
HMRC collected £865.2 billion over the 2024 to 2025 tax year, representing 93.6 per cent of all tax due, but non-compliance by small businesses alone constituted 62% of the gap. This was primarily due to unpaid Corporation Tax, as the tax gap rose to 18.1%.
HMRC noted that the tax gap for Corporation Tax had been broadly stable until COVID. In 2019-2020, it rose to 15.6%, but this was partly due to improvements in data collection.
Summary of figures
- The tax gap for VAT was 6.6% in 2024-2025.
- The tax gap for Income Tax, National Insurance contributions and Capital Gains Tax stood at 4% in 2024-2025, well below the 5.3% in 2013-2014.
- The tax gap for excise duty reduced was 5.5% in 2024-2025.
- The largest components of the tax gap by tax type in 2024-2025 are for Corporation Tax, Income Tax, National Insurance Contributions and Capital Gains Tax.
- The tax gap from individuals was the lowest proportion of the tax gap at 4% in 2024-2025.
Failure to take reasonable care, error and evasion are among the main behavioural reasons for the overall tax gap. Tax evasion accounted for 12% of last year’s tax gap, HMRC said.
To see the full details of HMRC’s report, go here https://www.gov.uk/government/statistics/measuring-tax-gaps
If you need help with your tax calculations and returns, please contact us. We’d be happy to help.
A response to Land Remediation Relief consultation
The government has published a response to its consultation ‘Land Remediation Relief’ (LRR). The review sought to understand whether the Corporation Tax relief continues to incentivise the redevelopment of brownfield land and whether reforms are needed to ensure it remains effective, accessible and aligned with modern remediation practices.
LRR is a Corporation Tax relief designed to support the regeneration of contaminated or long-derelict land and reduce pressure to develop greenfield sites. The relief allows companies to claim an additional 50% for qualifying revenue expenditure and 150% for qualifying capital expenditure.
It has two components: contaminated land and derelict land.
Contaminated land relief gives relief for expenditure on preventing, minimising or remedying harm caused by contamination. Derelict land relief is for land that cannot be made productive without removing buildings or structures, provided it has been continuously derelict since 1 April 1998.
The consultation respondents said that LRR rarely drives site selection; commercial factors such as planning risk, build costs and market conditions determine whether a site is taken forward. LRR is seldom considered at the outset because qualifying costs cannot be reliably estimated until intrusive investigations begin.
Many respondents said the scope of qualifying expenditure is too narrow. Activities such as certain demolition works, mineshaft grouting, gas-holder remediation and some invasive species removal fall outside the regime, despite being essential to making land developable.
SMEs reported significant administrative challenges as remediation costs are often embedded within wider contractor pricing, making it difficult to identify qualifying expenditure. There were also inconsistent interpretations of the rules and a lack of clear HMRC guidance.
Interestingly, the payable tax credit had a limited influence on a project. Many businesses preferred to carry losses forward for relief at higher tax rates. Views on grants were mixed. Grants can materially affect viability but are discretionary and slow to secure. LRR is rules-based and predictable, but its benefit is delayed and often modest.
The government has concluded that LRR is not meeting its intended objective of materially incentivising brownfield development. While LRR remains valuable for some marginal or highly contaminated sites, the government sees a compelling case for reform rather than abolition.
Further details will be published in due course.
More consultations hint at what’s to come
The government has published a raft of consultations on tax and business policies. It is worth being aware of these, as they are a good indicator of future policy direction likely to impact small businesses.
It is worth noting that your responses to a subject of interest will not be wasted. Most consultations get surprisingly few responses, and those are generally dominated by interest groups and industry-related organisations. One consultation on Welsh tax proposals got only four responses.
Call for evidence on PAYE Settlement Agreements (PSAs)
HMRC have launched a call for evidence on how ‘PAYE Settlement Agreements (PSAs)’ operate in practice, to improve clarity, consistency and administrative efficiency. PSAs allow employers to settle the Income Tax and Class 1B National Insurance Contributions (NICs) due on certain benefits and expenses on behalf of employees, instead of reporting them through payroll or on a P11D.
The government is seeking detailed feedback on how employers decide what to include in a PSA, how the rules are interpreted, and whether the current framework remains fit for purpose.
The call for evidence focuses on the practical operation of PSAs rather than the underlying tax rules for benefits and expenses. HMRC want to understand:
- How organisations determine whether an item is minor, irregular or impracticable to report through standard PAYE routes.
- How PSAs interact with other reporting mechanisms, including payrolling benefits and P11D reporting.
- How employers apply the existing rules in real-world scenarios and where uncertainty or inconsistency arises.
The government emphasises that PSAs are intended for items where it is genuinely difficult to identify the precise value attributable to each employee, such as catering at large staff events where individual consumption cannot be measured.
HMRC want to know how PSAs are managed, including time and resources, how employers handle calculations, including gross-up methodologies and allocation across tax bands.
The call for evidence also explores whether PSA rules affect employers differently depending on size, sector or workforce structure. HMRC are particularly interested in whether SMEs face disproportionate administrative burdens.
The consultation closes on 15 September 2026. Responses can be made by email or by post.
The full consultation document can be found at https://www.gov.uk/government/calls-for-evidence/paye-settlement-agreements-call-for-evidence/paye-settlement-agreements-psas
Mandatory Direct Debit proposed for VAT and PAYE payments
The government is consulting on proposals that will require most VAT-registered businesses and employers to pay VAT and PAYE liabilities by Direct Debit. The aim is to reduce late payment and simplify the payment process.
HMRC’s analysis suggests that late payment is often linked to missed deadlines or to payments being allocated incorrectly, rather than to an inability or unwillingness to pay. Views are sought on why businesses that could use Direct Debit choose to pay by other electronic methods, the impact of requiring payment by Direct Debit and the exceptions or alternative arrangements that may be needed.
Currently, PAYE legislation only requires employers with at least 250 employees to pay via a range of electronic means, including Direct Debit.
Any changes would include updated sanctions for non-compliance and the consultation seeks views on these issues.
The consultation closes on 16 August 2026 and can be found at https://www.gov.uk/government/consultations/requiring-paymentof-vat-and-paye-return-liabilitiesbydirect-debit
If you have queries or face problems with these tax reporting requirements, please contact us. We are here to help.
Funding and support for biotech start-ups
The Biotechnology and Biological Sciences Research Council (BBSRC) and the Science and Technology Facilities Council (STFC) DeepTech Catalyst Bio programme is open for applications. It supports early-stage biotechnology businesses in developing products and accessing markets.
Successful applicants receive:
- £50,000 in research and development (R&D) funding.
- A £10,000 innovation voucher for R&D activity.
- Technical, commercial, business and intellectual property support.
- Access to investors, customers and sector networks.
- Use of UK Research and Innovation (UKRI) campuses.
Applications will be taken from businesses that are UK-registered and less than five years old, are majority-owned by founders and employees and have previously received support from BBSRC, UKRI, Innovate UK, or a UKRI-supported accelerator.
The product or service must be based on bioscience innovation within BBSRC’s remit, be beyond the concept stage and address a clear market opportunity.
Eligible technologies must be biological in nature, interact with biological systems, or address a biological challenge. Applications focused solely on medical or clinical devices, therapeutics or diagnostics are not eligible.
Businesses interested in applying can find out more at https://iuk-business-connect.org.uk/opportunities/deeptech-catalyst-bio-2026/
The deadline for expressions of interest is 11:59 pm on 16 August 2026.
New investment for former coalfield areas
It has been confirmed that former coalfield areas in England, Scotland and Wales will get a share of £13.5 million to construct new industrial developments for businesses.
The money from the Government’s Growth Mission Fund will pay for half of the construction costs of new industrial developments that will house Small and Medium-sized Enterprises. The Coalfields Regeneration Trust – a charity dedicated to creating jobs and injecting growth into coalfield areas – will fund the other half.
The funding will support entrepreneurs in those areas who want to start their own business or business owners who want to expand their company in their home town. Subject to approval of the final business cases, the six areas set to receive funding are:
- Cowdenbeath (Perth Road): 51,000 square feet of light industrial units will be built along with a substation and 87 car parking spaces. 103 jobs will be created on site, with hundreds more supported.
- St Helens (Robins Lane, Sutton Fold): 32,000 square feet of light industrial units will be built alongside 54 car parking spaces. 64 jobs will be created on-site.
- Thoresby (Thoresby Vale Colliery): A 22,500 square foot industrial development is proposed once the site is purchased – expected later this summer.
- Ashington (Ashwood Business Park): A 49,500 square foot industrial development is proposed once the site is purchased. The sale is expected to be completed later this summer.
- Resolven (Vale of Neath Business Park): A 30,000 square foot industrial development is proposed once the site is purchased and planning permission secured.
- Seven Sisters (Nant y Cafn Business Park): A 45,000 square foot industrial development is proposed once the site is purchased and planning permission secured.
Once complete, sites will be self-sustaining, with rent revenue reinvested into the local communities.