Tax gap wider than anticipated: SMEs should remain aware of tax obligations

HM Revenue & Customs (HMRC) have stated that despite predictions, the tax gap has widened, mainly due to small and medium-sized enterprises (SMEs).

The tax gap is the difference between the amount of tax owed and how much has been paid.

HMRC’s data for 2021/22 show that SMEs contribute significantly to the national tax gap, with 56 per cent (£20.2 billion) of the total gap (£36 billion) accounted for by underpayments or non-payments by these businesses.

The tax authority attributes much of this gap to negligent errors made by SMEs.

Ensuring compliance can help to narrow this gap and prevent SMEs from being hit by easily avoidable tax penalties and investigations.

Understanding tax obligations

Businesses need to have a specialist understanding of the taxes they are liable for. These include Corporation Tax, VAT, Income Tax and National Insurance Contributions via PAYE.

According to HMRC, Corporation Tax, Income Tax, National Insurance Contributions and Capital Gains Tax together account for 65 per cent of the total tax gap.

Organisation and meeting deadlines

SMEs should remain organised and keep thorough records of all financial transactions. A lack of sufficient care was responsible for almost a third (30 per cent) of all underpayments of tax.

It seems an obvious observation but ensuring that all tax returns and payments are submitted by the relevant deadlines will mean SMEs avoid penalties for late submission.

Delays in payment or submission can also increase the chances of errors as a last-minute rush often leads to carelessness.

Stay up to date with tax laws and changes

Tax laws are subject to change and being unaware of any updates could lead to errors in your tax reporting that result in penalties, fines and investigations.

SMEs should ensure that they are up to date with the latest changes in tax laws, rates, and deadlines.

Maintain good communication with HMRC

If SMEs do find themselves to be in a position where they’re unable to pay their taxes on time, they should reach out to HMRC and explain the situation. They might be able to offer a payment plan or provide other solutions.

While it has always been advised that SMEs pay close attention to tax compliance, the recent spotlight on the tax gap and HMRC’s interest in the topic should make tax obligations a top priority.

If you are an SME business owner and would like assistance with your tax obligations, our expert team of tax professionals are here to help.

Posted in Business.