The £17 billion of tax HMRC is choosing not to collect

SUMMARY

Richard Murphy, political economist and tax expert, examines HMRC's latest tax gap statistics, revealing that £17.3 billion in corporation tax owed by small UK companies goes uncollected each year. He argues that this failure undermines fair competition, facilitates widespread abuse, and deprives public services of critical funding.

MAIN POINTS

• The UK tax gap represents the difference between tax owed and tax actually paid, with recent figures showing a persistent and significant shortfall. [1:02]
• While VAT and excise duty gaps have declined, the corporation tax gap—especially among small businesses—has surged, now accounting for a substantial portion of unpaid tax. [5:00]
• Small businesses are responsible for a rapidly growing share of the corporation tax gap, with nearly half of tax owed by this sector remaining unpaid. [10:01]
• A large number of UK companies are dissolved annually without filing accounts or paying corporation tax, enabling widespread tax abuse with little regulatory oversight. [16:00]
• Proposed legislative solutions would require banks to report company activity and hold directors personally liable for unpaid taxes, aiming to close the tax gap and enforce accountability. [20:01]
• Murphy contends that recovering this uncollected tax could fund major public investments, such as building 50,000 council houses annually, if political will existed to enforce existing laws. [22:02]

DETAILED ANALYSIS

Recent HMRC data reveals a persistent and growing gap between the amount of tax legally owed and what is actually collected in the UK, with the latest figures showing £59.2 billion unpaid across all taxes for 2024-25. Of particular concern is the corporation tax gap, which has surged to £21 billion, with £17.3 billion attributable to small companies alone. This represents a dramatic increase from just over £1 billion a decade ago and now means that nearly 45% of corporation tax owed by small businesses is not paid.

The rise in the number of small companies, from under 4 million in 2016 to nearly 5.8 million today, has been accompanied by a corresponding increase in tax abuse, facilitated by lax regulation and the ease of forming limited liability companies.

The data indicates that while HMRC has made progress in reducing VAT and excise duty gaps, it has failed to address the growing problem of non-payment among small businesses. The self-assessment system for corporation tax, combined with a withdrawal of HMRC from local communities and a lack of active monitoring, has allowed widespread abuse to go unchecked. Many small companies simply do not declare their tax liabilities or pay what is owed, and HMRC's siloed approach means that unpaid corporation tax is not cross-referenced with other tax gaps such as VAT or PAYE, likely understating the true scale of the problem.

A key factor enabling this abuse is the high rate of company dissolutions—around 800,000 annually—where many businesses disappear without filing accounts or tax returns. Companies House permits these dissolutions even when tax may be owed, effectively allowing companies to evade their obligations with impunity. Murphy argues that this is not accidental but a deliberate exploitation of weak enforcement, amounting to criminality on a significant scale.

The lack of a dedicated law enforcement agency for company law in the UK exacerbates the issue, creating a 'wild west' environment for corporate regulation.

Murphy has proposed legislative solutions to address these systemic failures. His General Anti-Tax Avoidance Principle Bill and the UK Corporate and Individual Tax and Financial Transparency Bill, presented in Parliament by Michael Meacher MP in 2013 and 2014, would pierce the corporate veil for small companies, making directors and shareholders personally liable for unpaid taxes. The bills would also require banks to report annually to HMRC and Companies House on company activity, providing the data needed to estimate and recover unpaid tax.

Despite passing parliamentary scrutiny, these bills were blocked by political opposition, notably from Jacob Rees-Mogg.

The consequences of failing to address the tax gap are far-reaching. Not only does it deprive the public sector of resources that could fund essential services—such as building 50,000 new council houses annually—but it also undermines fair competition. Honest businesses are placed at a disadvantage, unable to compete with those that evade their tax responsibilities.

Murphy contends that enforcing tax law and closing the gap would create a level playing field, support local economies, and restore integrity to the UK’s tax system. The issue, he argues, is not a lack of available funds but a lack of political will to enforce existing laws and ensure everyone pays their fair share.

LINKS

• YouTube poll related to the video topic.
• Official website for Tax Research UK, hosting the video transcript and related resources.
• ChatGPT prompt and instructions for writing to an MP about the issues discussed.
• Donation page to support Tax Research UK.
• Richard Murphy's Bluesky social profile.
• Richard Murphy's Funding the Future blog.
• Introduction video for the Richard J Murphy YouTube channel.
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