Is a 6.4% tax gap actually bad?

It is worse than the two years before it. HMRC has revised 2023-24 up from 5.3% to 6.0% and 2022-23 to 6.6%, so 6.4% for 2024-25 sits at the top of a rising short-run trend, even though the long run is still well below the 7.5% recorded in 2005-06. In cash the gap is £59.2 billion against £924.4 billion of theoretical liabilities. The number that matters more for a small company owner is the composition rather than the total: 62% of the gap is attributed to small businesses.

HMRC says small businesses are 62% of the gap. Does that mean small businesses are cheating?

No, and HMRC's own behavioural split says so. Failure to take reasonable care accounts for 35% of the gap and error a further 16% — so 51%, over half, is carelessness and mistakes. Deliberate evasion is 12%. The concentration in small businesses reflects who is doing their own bookkeeping under time pressure with imperfect information, not who is dishonest. It also explains why Corporation Tax has the highest gap rate of any major tax at 18.1%: it is the tax whose figure depends most directly on the quality of the underlying records.

What does HMRC mean by “reasonable care”, and what does failing it cost?

It is a legal test in the penalty regime, not a figure of speech. If your return is wrong but you took reasonable care, there is no penalty — you pay the tax and interest and that is the end of it. If the inaccuracy was careless, the penalty is 0% to 30% of the tax lost where you disclose it unprompted, and 15% to 30% where HMRC finds it first. Deliberate inaccuracies run 20% to 70%, and deliberate and concealed 30% to 100%. Keeping records good enough to find your own errors is worth real money.

What is the difference between prompted and unprompted disclosure?

A disclosure is unprompted only if you tell HMRC before you have any reason to believe it has discovered the inaccuracy or is about to. Everything else is prompted, and once a compliance check has opened you are almost always in prompted territory. On a careless error the difference is the gap between a possible nil penalty and a minimum of 15% of the tax lost. On £30,000 of understated Corporation Tax that is a minimum of £4,500 that existed only because somebody else spotted it first.

If I find a mistake in an old return, should I tell HMRC?

In almost every case, yes, and sooner rather than later. Correcting it yourself keeps the disclosure unprompted, which puts a careless error in the 0% to 30% band instead of 15% to 30%, and it stops interest running — currently 7.75% a year, set at the 3.75% base rate plus four percentage points. Interest and the tax itself are payable regardless of behaviour, so delay only ever adds cost. Get the corrected figures prepared properly before you make the disclosure, because the quality of what you hand over affects where in the range the penalty lands.

What the 6.4% tax gap means for small business

Reacting to: Tax Gap 2024-25 estimated at 6.4% (gov.uk / HMRC) →

HMRC published its provisional tax gap figures for 2024-25 on 23 June 2026. The gap — the difference between the tax that should be paid and the tax actually paid — came to 6.4%, or £59.2 billion, against total theoretical liabilities of £924.4 billion. HMRC collected £865.2 billion of that, which is 93.6% of everything owed.

Two things in the detail are worth more than the headline. The first: the gap went up, not down. The 2023-24 figure has been revised from 5.3% to 6.0%, or £52.8 billion, and 2022-23 revised to 6.6%. The long-run trend is still down from 7.5% when HMRC started measuring in 2005-06, but the last two years moved the wrong way. The second: small businesses account for 62% of the whole gap — roughly £36.7 billion — and about half of that is Corporation Tax.

If you run a small limited company, HMRC's own data now names you as the single largest source of unpaid tax in the country. It is worth understanding precisely what it is accusing you of, because it is probably not what you think.

Over half of it is mistakes, not fraud

HMRC splits the gap by behaviour as well as by taxpayer. For 2024-25:

Failure to take reasonable care: 35% — about £20.7 billion. The single biggest cause, by a distance.
Error: 16% — about £9.5 billion. Genuine mistakes where reasonable care was taken.
Evasion: 12% — about £7.1 billion.

Carelessness and error together are 51% of the gap. Deliberate evasion is under an eighth of it. That matches what we see: most of what HMRC classes as non-compliance is a VAT return filed on an estimate because the bookkeeping was three months behind, an expense in the wrong category, a director's loan account nobody reconciled, or a return filed late because nobody had time to do it properly.

The by-tax split tells the same story. Corporation Tax is 35% of the gap at a 18.1% gap rate — the highest rate of any major tax. VAT is 20% of the gap at 6.6%. Income Tax, National Insurance and Capital Gains Tax together are another 35% at just 4.0%. Corporation Tax is the outlier because it is the one where the figure depends entirely on how well the underlying accounts were kept.

"Reasonable care" is a legal test, and it has a price

This is the part most owners have never had explained to them. "Failure to take reasonable care" is not HMRC being rude about your admin. It is a specific category in the penalty regime, and it is the line between owing tax and owing tax plus a penalty.

Where an inaccuracy leads to underpaid tax, the penalty is set as a percentage of the tax lost, and the percentage depends on two things: your behaviour, and whether you told HMRC or HMRC found it.

Reasonable care taken: no penalty at all, even though the return was wrong.
Careless, unprompted disclosure: 0% to 30%.
Careless, prompted disclosure: 15% to 30%.
Deliberate, unprompted: 20% to 70%. Prompted: 35% to 70%.
Deliberate and concealed, unprompted: 30% to 100%. Prompted: 50% to 100%.

A disclosure counts as unprompted only if you tell HMRC before you have any reason to believe it has discovered the problem, or is about to. Once a compliance check has started, you are in prompted territory.

What that is worth in cash

An illustrative example. A company understates its Corporation Tax by £30,000 — not through fraud, but because stock was miscounted, some capital spend went through as repairs, and a director's loan was never written up. The error surfaces 18 months after the tax was due.

Tax: £30,000 in every version below. That is not negotiable.
Interest: HMRC's late payment rate is 7.75% from 9 January 2026, set at the Bank of England base rate of 3.75% plus four percentage points. Over 18 months on £30,000 that is roughly £3,490. Also not negotiable.
Reasonable care taken: penalty nil. Total £33,490.
Careless, you found it and told HMRC, full cooperation: 0% to 30%. At the bottom of that range the penalty is nil. Total £33,490.
Careless, HMRC found it: 15% to 30%, so £4,500 to £9,000. Total £37,990 to £42,490.
Deliberate, HMRC found it: 35% to 70%, so £10,500 to £21,000. Total £43,990 to £54,490.

The distance between the second and third lines — between £33,490 and up to £42,490 on identical facts — is bought entirely with bookkeeping that was current enough for you to spot the problem first. That is the whole argument for keeping records in real time, expressed as a number.

The five things that create most of it

In practice the small business gap is made of a short list of recurring items:

VAT returns filed on estimates. If the bank has not been reconciled to the end of the quarter, the return is a guess. Guesses are careless by definition.
Director's loan accounts nobody tracks. An overdrawn account at the year end that is not repaid within nine months and one day triggers a section 455 charge. The rate rose with the dividend upper rate at the November 2025 Budget: 35.75% on loans made on or after 6 April 2026, and 33.75% on loans made before that date. It is refundable once the loan is repaid, but only after the money has left the company.
Capital spend treated as repairs. A common Corporation Tax adjustment, and one of the reasons the Corporation Tax gap rate is nearly three times the VAT rate.
Personal costs in the company. Not fraud in most cases — just a card used for two things and never split.
Records reconstructed at the deadline. Everything above is a symptom of this one.

What to do about it this month

A short, concrete checklist:

Reconcile your business bank account to the actual statement balance, today, and then keep it that way. Everything else depends on it.
Pull your director's loan account balance and write the section 455 deadline — nine months and one day after your year end — in the diary.
Take last quarter's VAT return and check it against the reconciled ledger rather than the estimate it was filed on. If there is a difference, correcting it now is unprompted.
Review any single item of spend over £1,000 in the last year and ask whether it was capital or revenue.
Set one date a month, not one date a year, when the books are brought current.

Government measures announced since Autumn Budget 2024 are intended to raise a further £10 billion a year by 2029-30 by closing this gap. The businesses that get caught by that are not, mostly, the ones evading tax. They are the ones whose records could not support the figures they filed.

Where this actually gets fixed

The honest fix for most of £36.7 billion is not a crackdown. It is records kept as things happen rather than reconstructed at a deadline. That is the entire premise behind cloud bookkeeping done properly — transactions categorised as they occur, a VAT position you can see on any day of the month, and numbers your accountant has reviewed before they go near HMRC. It is also why we treat Tax Planning as an ongoing conversation rather than an annual fire drill.

None of this needs a bigger business or a bigger budget. It needs the basics current all year. If you are not sure yours are, our accountancy packages set out what current looks like and what it costs, and our guide to allowable business expenses covers the categorisation that causes most of the trouble.

The tax gap is 6.4% — and small businesses are the biggest slice