danneidle.bsky.social
Founder of Tax Policy Associates Ltd. Tax realist. @danneidle on Twitter
2,374 posts
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Active Commenter
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Unclear!
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But the bottom line: if we don't all talk about the small business tax gap, and gawp at this astonishing chart, then nothing will change.
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Plus: there's good reason to believe that a significant chunk of the "small company" tax gap isn't real small companies at all, but companies established by bad actors for the sole purpose of ripping off the taxman. See our report for more details.
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It means that small companies that pay their taxes properly are put at a competitive disadvantage compared to those who cheat. It rewards the unscrupulous and punishes the honest.
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The idea that we should tolerate small company tax avoidance/evasion/non-payment to help small companies is badly misconceived...
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(Thanks to Heather Self for spotting that!)
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How can I be so confident that more compliance will be self-funding? Because of this chart:
The small business tax gap doubled over the last five years, but "compliance yield" (the return from HMRC's investigation/compliance work) didn't change at all. It's teensy-tiny.
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Both reactions are wrong. Devoting more attention and resources to the small company tax gap will be self-funding; it's not going to reduce resources used to pursue wealthy/corporate tax avoiders/evaders.
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This doesn't fit any media narrative very well.
It's inconvenient for people on the Left, who want to talk about the wealthy and large companies
It's inconvenient for people on the Right, who often don't like the idea of taxing small companies at all
And so nobody's cared.
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If the small business tax gap had followed the same trend as the large business tax gap, HMRC would collect £15bn more tax every year.
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If you missed it, here's our report from yesterday on the latest HMRC data, with the astonishing 40% stat: taxpolicy.org.uk/2025/06/19/t...
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Yes, bit absent minded of me to crop it here!
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Not incompetence. Some is fraud. But the increase is harder to explain.
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HMRC's success in reducing the tax gap over the last 20 years suggest that its failure to close the small business tax gap can and should be remedied. £15bn is an extraordinary sum to lose behind the administrative sofa.
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And another answer is that the focus on sexy tax avoidance by billionaires and multinationals has taken too many headlines, and distracted too many people, from what the majority of tax avoidance and evasion actually looks like. We should follow the data.
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Another answer is having the right tools to attack aggressive avoidance. The recent Government consultation is very promising - but HMRC will need both focus and funding to make any new legislation work. www.gov.uk/government/c....
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How to fix it?
One answer is funding. However, HM Treasury mustn't just shower HMRC with additional funding; new funds need to be carefully directed and managed.
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So it's our view, albeit based on anecdote and sources rather than hard evidence, that much of the growing small business tax gap is driven by remuneration tax avoidance schemes.
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Our sources at both HMRC and in the tax avoidance "industry" have told us they believe these schemes cost HMRC £5bn each year. And the critical point: these schemes are technically classified as small businesses.
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These structures are little more than scams, but there are vast numbers of them, and they make up most of the schemes listed on the avoidance pages on the HMRC website. www.gov.uk/government/p...
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But a great many involve companies established to act as employers of contract workers, evading or avoiding tax on the workers' remuneration (usually without the workers' knowledge). taxpolicy.org.uk/2023/07/03/s...
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Some are "traditional" tax avoidance schemes marketed to small businesses. taxpolicy.org.uk/2023/06/22/f...
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We are inundated with reports of tax avoidance and evasion - more than we can ever investigate. Most of these are relate to small businesses.
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It isn't surprising that it's small business that suffers the most from these problems.
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It's not merely that HMRC funding has failed to keep pace with inflation; its most experienced personnel were moved onto other projects, particularly Brexit and the pandemic, and didn't move back. Here's the National Audit Office:
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There have been many anecdotal reports of a decline in HMRC customer service. Here's the CBI and the Chartered Institute of Taxation:
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We believe there are two key factors: a decline in HMRC customer service to small companies, and an upsurge in avoidance and evasion which doesn't really relate to small companies at all, but is technically allocated to them.
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Small businesses have always been responsible for the majority of tax evasion and non-compliance. The cliché of men in white vans receiving payment in cash isn't that far from the truth. This explains why the small business tax gap is hard to close. It doesn't explain why it's increased.
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So what's going on?
I believe there are two separate causes: a decline in HMRC customer service, and an upsurge in a particular type of aggressive tax avoidance.
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What's this costing us?
If the small business tax gap had declined at the same rate as the mid-sized business tax gap, HMRC would collect an additional £15 billion every year.
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The small business tax gap increased from 2.4% of all UK tax revenues in 2005/6 to 3.2% in 2023/24. The rest of the tax gap fell precipitously over that period - large businesses from 1.7% to 0.7%; mid-sized businesses from 1.% to 0.5%.
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It's worse than this. The small business tax gap isn't limited to corporation tax. If we step back and look at the HMRC figures across all taxes we see another dramatic divergence:
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An obvious explanation is that this is a post-Covid effect. However there's no such trend seen if we look at the figures for tax returns from individuals:
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The problems appear to be widespread. HMRC data shows that well over a third of small businesses now underpay their tax by more than £1,000 - a doubling since 2018/19:
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These figures are astonishing to me. 40% of all small business corporation tax isn't being paid.
There's a sharp contrast with the large and mid-sized business corporation tax gap, which HMRC has been remarkably successful at closing.
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Over the last 20 years, HMRC has been amazingly successful reducing the tax gap - cutting most of it by more than 50%.
But the small business tax gap hasn't gone down. It's gone up. Here's corporation tax:
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The "tax gap" is all the tax that should be paid, but isn't.
People wanting clicks and headlines claim most of the tax gap is the mega-wealthy and large corporations. People looking at the data know it's like this:
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Solved!
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Employer NICs, sure. But employee NICs are (broadly!) calculated as a % of taxable income, as is income tax.
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The effective rate of income tax on many rental properties is very high, given so many are BTL and interest relief is now restricted.
I’m not aware of good data but I expect it’s over 40% already.
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I thought a weighted average of the top combined Scottish rate (50%) and the top combined rest-of-UK rate (47%)
but the Scottish population is around 7% of the UK population, so a weighted average would be around 47.2%.
We're stumped.
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Expand the base, lower the rate.
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So in theoretical economics land, even an ambitious property tax isn’t going affect central London residential property values very much.
The “stickiness” of property prices suggests the real world impact would be lower.
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For a wealthy individual owner, an appropriate discount rate would be 8% or higher, implying a fall in value of 12.5% or less.
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Is that right? Let’s assume an ambitious 1% annual tax on the value of property. For a property investor (who might use a 4% discount rate) that implies a drop in value of the property of 25%. 1/2
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This seems very simplistic.
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That’s exactly what a neoliberal would say.