Official Statistics

5. Tax gaps: Corporation Tax

Updated 23 June 2022

Main findings

Uncertainty is inherent in all tax gap estimates.  We assign an uncertainty rating to tax gap components on a scale using the ratings ‘very low’, ‘low’, ‘medium’, ‘high’ to ‘very high’. Details are available in the ‘Methodology and data issues’ section of this chapter and the ‘Methodological annex’.

The Corporation Tax gap is estimated to be 9.0% of the overall Corporation Tax total theoretical liability in the tax year 2020 to 2021, which equates to £5.6 billion.

There has been a reduction in the Corporation Tax gap between the tax years 2005 to 2006 and 2020 to 2021 from 11.3% to 9.0%. Since 2014-15, the tax gap has been broadly stable.

The percentage tax gap for tax types may differ between the ‘Tax gaps: Summary’ chapter and the separate published tax gap breakdowns. In the ‘Tax gaps: Summary’ chapter, the percentage gap is calculated using published receipts and here we calculate the percentage tax gap using liabilities. We use receipts in the ‘Tax gaps: Summary’ chapter, as liability figures are not available at the required level across all types of tax.

The full data series can be seen in the online tables.

Components of Corporation Tax as a percentage of total theoretical tax liabilities, 2020 to 2021

Type of tax	Share of tax gap
Small businesses	19%
Mid-sized businesses	10%
Large businesses	2%

Large businesses

The 2020 to 2021 uncertainty rating for the Corporation Tax large businesses tax gap estimate is ‘high’.

The Corporation Tax gap for large businesses in 2020 to 2021 is estimated at 2.2% of total theoretical Corporation Tax liabilities, which equates to £0.6 billion.

The Corporation Tax gap for large businesses has decreased from 8.7% in 2005 to 2006 to the latest estimate of 2.2% in 2020 to 2021.

Most of the decrease occurred before 2012 to 2013, which coincided with a reduction in the headline Corporation Tax rate. Between 2012 to 2013 and 2020 to 2021, the tax gap has fallen at a slower rate from 3.7% to 2.2%.

This estimate relates to the largest businesses operating in the UK, each of which has an assigned HMRC customer compliance manager to improve the handling of their issues, provide risk assessment and make resourcing decisions to handle the highest risks.

Mid-sized businesses

The 2020 to 2021 uncertainty rating for the Corporation Tax mid-sized businesses tax gap estimate is ‘medium’.

The Corporation Tax gap for mid-sized businesses is estimated at 9.7% of total theoretical Corporation Tax liabilities in the tax year 2020 to 2021, which equates to £1.3 billion.

The Corporation Tax gap for mid-sized businesses has declined from 13.3% in 2005 to 2006 to the latest estimate of 9.7% in 2020 to 2021. The trend has been relatively flat in recent years.

Small businesses

The 2020 to 2021 uncertainty rating for the Corporation Tax small businesses tax gap estimate is ‘medium’.

The Corporation Tax gap for small businesses is estimated to be 19.1% of their total theoretical Corporation Tax liabilities in 2020 to 2021, which equates to £3.7 billion.

The percentage tax gap for small businesses has stayed at a similar level from 19.8% in 2005 to 2006 to 19.1% in 2020 to 2021. The gap followed a downward trend between 2005 and 2006 and 2011 to 2012 and has been on an upward trend since then.

The results of the Corporation Tax random enquiry programme (REP) show that the proportion of small businesses submitting an incorrect return leading to a loss of tax has declined from 41.4% in 2005 to 2006 to 16.1% in tax year 2017 to 2018. This is the latest year of findings available from the REP.

Results and tables

Corporation Tax gap breakdown

The Corporation Tax gap is estimated separately for small businesses, mid-sized businesses and large businesses.

Figure 5.1 shows the Corporation Tax gap estimate as a proportion of total theoretical Corporation Tax liabilities.

The Corporation Tax gap estimate as a proportion of total theoretical Corporation Tax liabilities has decreased from 11.3% in the tax year 2005 to 2006 to 9.0% in the tax year 2020 to 2021. Although the overall trend is largely downward, there are differences in the estimate between businesses of different sizes. Businesses managed by HMRC’s Large Business directorate continue to have a lower percentage tax gap than smaller businesses.

The estimate for small business Corporation Tax gap as a proportion of liabilities is the highest across the time series and large business Corporation Tax gap is the lowest. The long-term trend shows the overall Corporation Tax estimate as a proportion of liabilities has decreased since 2005 to 2006, although it has trended upwards since 2011 to 2012. In the last few years, the trend has remained constant.

Figure 5.1: Corporation Tax gap

Note for Figure 5.1

1. Figures for previous years have been revised.

Large businesses

The large businesses model uses operational audit data relating to accounting periods up to and including tax year 2016 to 2017. From the tax year 2017 to 2018 the tax gap estimate and compliance yield have been projected forward by applying a constant percentage to the liabilities for the relevant tax year. This is due to the length of time taken to close Corporation Tax compliance cases.

Using tax liabilities ensures that the projections reflect changes to Corporation Tax rates and taxable profits and assumes a stable level of underlying compliance.

Table 5.1 shows estimates of the large businesses Corporation Tax gap for 2005 to 2006 and 2016 to 2017, to 2020 to 2021. The net large business Corporation Tax gap has decreased from 8.7% (£2.6 billion) in 2005 to 2006, to 2.2% (£0.6 billion) in 2020 to 2021. Most of this decrease occurred before tax year 2012 to 2013, which coincided with a reduction in the headline Corporation Tax rate. Since 2012 to 2013, the tax gap has fallen slightly as a percentage of liabilities and has fallen slightly in cash terms to around £0.6 billion.

The large business Corporation Tax estimate has upper and lower bounds from 2014 to 2015 onwards.

The estimates are likely to be subject to larger revisions in future because the compliance yield is estimated based on the trend of liabilities.

Table 5.1: Estimated large business Corporation Tax gap (£ billion)

Component	Baseline 2005-06	2015-16	2016-17	2017-18	2018-19	2019-20	2020-21
Under-declared liabilities due to incorrect returns - upper estimate	—	5.1	3.9	4.2	4.3	4.1	4.3
Under-declared liabilities due to incorrect returns - central estimate	5.8	4.9	3.8	4.1	4.0	3.7	3.8
Under-declared liabilities due to incorrect returns - lower estimate	—	4.7	3.7	4.0	3.7	3.3	3.3
Compliance yield	3.0	3.9	2.9	3.4	3.4	3.1	3.2
Non-payment	0.1	0.0	0.0	0.0	0.0	0.0	0.0
Total tax gap - upper estimate	—	1.3	1.1	0.8	1.0	1.0	1.2
Total tax gap - central estimate	2.9	1.1	1.0	0.7	0.7	0.6	0.6
Total tax gap - lower estimate	—	0.9	0.9	0.6	0.4	0.3	0.1
Total theoretical tax liabilities	33.3	24.0	30.5	32.4	32.0	29.3	29.8
Proportion of liabilities	9%	5%	3%	2%	2%	2%	2%

Notes for Table 5.1

1. Figures for previous years have been revised. Figures rounded to the nearest £0.1 billion and 1%. As a result, components may not appear to sum.

2. Total tax gap includes avoidance estimates.

3. A projection factor is applied to the gross tax gap estimate for 2016 to 2017 to produce a projected estimate from 2017 to 2018. This is based on the trend in estimated Corporation Tax liabilities.

4. Estimates include both risks that are being worked (open) and risks that have been settled (closed).

5. Compliance yield is the total yield from closed risks plus the estimated compliance yield from open risks.

6. Compliance yield in this table relates to a specific accounting period and therefore cannot be compared to reported compliance yield in HMRC’s Annual Report and Accounts. A projection factor is applied to the compliance yield estimate for 2016 to 2017, to produce a projected estimate from 2017 to 2018. This is based on the trend in estimated Corporation Tax liabilities.

7. The baseline year 2005 to 2006 has been included to illustrate the long-term trend.

8. The full data series can be seen in the online tables.

Mid-sized businesses

The mid-sized business Corporation Tax gap model uses operational audit data relating to accounting periods up to and including tax year 2018 to 2019. From the tax years 2019 to 2020 the tax gap estimate and compliance yield are projected forward by applying a constant percentage to the liabilities for the relevant tax year. This is due to the length of time taken to close Corporation Tax compliance cases.

Using tax liabilities ensures that the projections reflect changes to Corporation Tax rates and taxable profits and assumes a stable level of underlying compliance.

Table 5.2 shows estimates of the mid-sized business Corporation Tax gap for 2005 to 2006, and from 2015 to 2016, to 2020 to 2021. The gap is estimated at 9.7% for 2020 to 2021, which is worth £1.3 billion.

The estimated level of the mid-sized business Corporation Tax gap has increased in cash terms from £0.8 billion in 2005 to 2006 to £1.3 billion in 2020 to 2021. However, Corporation Tax liabilities for mid-sized businesses have increased since 2005 to 2006, which means that the tax gap as a percentage of liabilities in 2020 to 2021 is 9.7%, down from 13.3% in 2005 to 2006.

The mid-sized business Corporation Tax estimate has upper and lower bounds from 2014 to 2015 onwards.

The estimates are likely to be subject to larger revisions in future because the compliance yield is estimated based on the trend of liabilities.

Table 5.2: Estimated mid-sized business Corporation Tax gap (£ billion)

Component	Baseline 2005-06	2015-16	2016-17	2017-18	2018-19	2019-20	2020-21
Under-declared liabilities due to incorrect returns - upper estimate	—	2.1	2.6	2.8	2.7	2.5	2.7
Under-declared liabilities due to incorrect returns - central estimate	1.2	1.4	1.7	1.8	1.6	1.4	1.5
Under-declared liabilities due to incorrect returns - lower estimate	—	0.8	0.8	0.7	0.4	0.3	0.2
Compliance yield	0.4	0.4	0.4	0.4	0.2	0.2	0.2
Non-payment	0.1	0.1	0.1	0.1	0.1	0.1	0.0
Total tax gap - upper estimate	—	1.8	2.2	2.6	2.6	2.4	2.5
Total tax gap - central estimate	0.8	1.1	1.4	1.5	1.5	1.3	1.3
Total tax gap - lower estimate	—	0.5	0.5	0.4	0.3	0.2	0.1
Total theoretical tax liabilities	6.3	11.2	13.3	13.8	14.4	12.7	13.2
Proportion of liabilities	13%	10%	10%	11%	10%	10%	10%

Notes for Table 5.2

1. Figures for previous years have been revised. Figures rounded to the nearest £0.1 billion and 1%. As a result, components may not appear to sum.

2. Total tax gap includes avoidance estimates.

3. Projection factor applied to the gross tax gap estimate for 2018 to 2019 to produce a projected estimate from 2019 to 2020. This is based on the trend in estimated Corporation Tax liabilities.

4. Estimates include both risks that are being worked (open) and risks that have been settled (closed).

5. Compliance yield is the total yield from closed risks plus the estimated compliance yield from open risks.

6. Compliance yield in this table relates to a specific accounting period and therefore cannot be compared to reported compliance yield in HMRC’s Annual Report and Accounts. A projection factor is applied to the compliance yield estimate for 2018 to 2019 to produce a projected estimate from 2019 to 2020. This is based on the trend in estimated Corporation Tax liabilities.

7. The baseline year 2005 to 2006 has been included to illustrate the long-term trend.

8. The full data series can be seen in the online tables.

Small businesses

Our established methodology uses random enquiry programmes (REPs) to establish the levels of non-compliance in respect of each year’s liabilities. Incorrect tax returns are those found by our enquiries to have under-declared tax liability. This could be as a result of error, failure to take reasonable care or evasion. There is a lag between tax liabilities arising and completion of REPs. Normally, this means that we need to project levels of non-compliance for the final 2 years of our published tax gap series. The latest Corporation Tax small business REP data available is from 2017 to 2018, and these elements of the tax gap are projected for 3 years due to increased REP uncertainties from different ways of working cases during the pandemic, more time for 2018 to 2019 REP cases to close and to complete assurance and validation of the results. Estimates are projected forward by applying a constant percentage gross tax gap to the liabilities for the relevant tax year.

Further details about the Corporation Tax REP can be found in the ‘Methodological annex’.

Table 5.3 shows estimated Corporation Tax gaps for small businesses between 2005 to 2006 and 2020 to 2021.

The latest Corporation Tax REP data used is for 2017 to 2018. The Corporation Tax percentage tax gap for small businesses has decreased from 19.8% of theoretical liabilities in 2005 to 2006 to 19.2% in 2017 to 2018 and is projected to remain at similar levels. The gap followed a downward trend between 2005 and 2006 and 2011 to 2012 and has been on an upward trend since then.

Table 5.3: Estimated small business Corporation Tax gap (£ billion)

Component	Baseline 2005-06	2015-16	2016-17	2017-18	2018-19	2019-20	2020-21
Under-declared liabilities due to incorrect returns - upper estimate	3.3	6.5	6.0	8.5	9.0	8.8	9.2
Under-declared liabilities due to incorrect returns - central estimate	1.8	2.7	2.9	3.4	3.6	3.5	3.7
Under-declared liabilities due to incorrect returns - lower estimate	0.8	1.3	1.5	1.5	1.6	1.6	1.7
Compliance yield	0.1	0.2	0.2	0.2	0.2	0.1	0.1
Non-payment	0.1	0.2	0.2	0.2	0.2	0.2	0.1
Total tax gap - upper estimate	3.3	6.5	6.0	8.6	9.0	8.8	9.2
Total tax gap - central estimate	1.8	2.7	3.0	3.4	3.6	3.6	3.7
Total tax gap - lower estimate	0.8	1.2	1.5	1.6	1.6	1.6	1.6
Total theoretical tax liabilities	8.9	16.0	17.8	17.8	18.7	18.3	19.1
Proportion of liabilities	20%	17%	17%	19%	19%	19%	19%

Notes for Table 5.3

1. Figures rounded to the nearest £0.1 billion and 1%. As a result, components may not appear to sum.

2. Total tax gap includes avoidance estimates.

3. Figures for previous years have been revised.

4. Tax gap estimates from 2018 to 2019 are projected based on a constant gross tax gap and Corporation Tax small business liabilities figures for the respective years.

5. Compliance yield is distributed by period of settlement of enquiry.

6. The baseline year 2005 to 2006 has been included to illustrate the long-term trend.

7. The full data series can be seen in the online tables.

Table 5.4 shows that between the years 2005 to 2006 and 2017 to 2018, the proportion of small businesses submitting an incorrect Corporation Tax return leading to a loss of tax, decreased from 41.4% to 16.1%. These figures are revised as more cases are settled over time.

The decline in the proportion of small businesses with incorrect returns since 2005 to 2006 has been much greater for those with an annualised additional liability between £0 and £1,000, than for those with an annualised additional liability of more than £1,000. The proportion of businesses which had annualised additional liability up to £1,000 fell from 22.1% in 2005 to 2006 to 5.7% in 2018 to 2019. For the proportion of small businesses which had annualised additional liability of more than £1,000, the equivalent figures are 19.3% and 10.5% respectively.

Table 5.4: Proportion of small businesses with incorrect Corporation Tax returns where additional liability established

Component	Baseline 2005-06	2012-13	2013-14	2014-15	2015-16	2016-17	2017-18
Proportion of small businesses with incorrect returns	41%	25%	25%	21%	22%	21%	16%
of which additional liability between £0 and £1,000	22%	10%	12%	8%	6%	5%	6%
of which additional liability greater than £1,000	19%	15%	13%	13%	16%	16%	10%

Notes for Table 5.4

1. Figures rounded to the nearest 1%. As a result, components may not appear to sum.

2. Figures for previous years have been revised.

3. The baseline year 2005 to 2006 has been included to illustrate the long-term trend.

4. The full data series can be seen in the online tables.

Avoidance

The Corporation Tax avoidance tax gap (included in the total Corporation Tax gap) is estimated to be £0.6 billion for 2020 to 2021. It is estimated separately for large businesses (£0.5 billion), mid-sized businesses (less than £0.1 billion) and for small businesses (less than £0.1 billion). This is part of an illustrative breakdown of behaviours.

Methodology and data issues

Overview

Since the ‘Measuring tax gaps 2020 edition’ we’ve used a statistical approach for estimating the large and mid-size business Corporation Tax gaps.

The estimate for Corporation Tax small business continues to be based on our REP.

Large businesses

Estimates of the large business Corporation Tax gap come from information on our case management system, where tax specialists record the yield collected against risks identified and investigated. See the ‘Methodological annex’ for more information.

The Large Business directorate reports compliance yield on a year of impact basis, whereas the tax gap estimates are based on a financial year accounting period basis. For tax gap purposes only, compliance yield is calculated as the total yield from closed avoidance or litigated technical risks relating to that accounting period, plus the estimated compliance yield from open avoidance risks and technical risks in litigation.

To get a final large business Corporation Tax net tax gap, we subtract compliance yield from the results of the model and add estimates for losses from non-payment and avoidance.

Uncertainty rating

The 2020 to 2021 uncertainty rating for the Corporation Tax large businesses tax gap estimate is ‘high’. This means that the model captures the tax base and most forms of non-compliance. The Extreme Value methodology is suitable for the population and uses reliable data, although it relies on certain assumptions and is sensitive to year-on-year compliance activity.

Areas of uncertainty arise from the projections applied to estimate the four most recent tax years and the sensitivity to changes in compliance activity which the compliance yield data is based on. The rating has increased from ‘medium’ in the ‘Measuring tax gaps 2021 edition’ to ‘high’ due to a longer projection than previously used.

Mid-sized businesses

The Corporation Tax gap estimate for mid-sized businesses follows the same methodology that we use for the large business estimate. A detailed breakdown of the methodology can be found in the ‘Methodological annex’.

Uncertainty rating

The 2020 to 2021 uncertainty rating for the Corporation Tax mid-sized businesses tax gap estimate is ‘medium’. This means that the model captures the tax base and most forms of non-compliance. The Extreme Value methodology is suitable for the population and uses reliable data, although it relies on certain assumptions and is sensitive to year-on-year compliance activity.

Areas of uncertainty arise from the projections applied to estimate the two most recent tax year estimates and the sensitivity to changes in compliance activity which the compliance yield data is based on. This uncertainty rating is unchanged from the ‘Measuring tax gaps 2021 edition’.

Small businesses

The Corporation Tax REP allows HMRC to estimate the extent of under-declaration of liabilities arising from the submission of incorrect Corporation Tax returns. The random sample used for the programme is selected from the small business population who are issued with a notice to file a Corporation Tax return.

Enquiries are taken up into the sampled returns. The results are then applied to the general population to produce estimates of non-compliance. Small businesses which do not submit a tax return in the year in question are not included in the tax gap calculations.

As enquiries can take several years to settle, it is necessary to make assumptions about any enquiries that are still open at the time of analysis. This means figures are subject to revision until all enquiries are settled. Estimates have been revised since the previous publication, to include information on the outcomes of late settling enquiries.

Further details are available in the ‘Methodological annex’ – please see Chapter H: Estimates using random enquiry programmes (REP).

Uncertainty rating

The 2020 to 2021 uncertainty rating for the Corporation Tax small businesses tax gap estimate is ‘medium’. This means that the model captures the majority of the tax base and its population, the stratified REP methodology is robust, and the random enquiry data is reliable and suitable for purpose.

Areas of uncertainty include the projections applied to account for years where we do not have random enquiry data and it is necessary to forecast the expected compliance yield for enquiries that are still ongoing.

Additional uncertainty comes from the non-compliance which is missed or not fully investigated in an audit. This uncertainty is mitigated by the inclusion of a non-detection multiplier. For the ‘Measuring tax gaps 2022 edition’, we introduced a specific non-detection multiplier using the ‘Delphi’ approach to estimate the Corporation Tax small business tax gap. Further details about the Delphi approach and non-detection multipliers can be found in HMRC’s working paper ‘Non-detection multipliers for measuring tax gaps’.

The rating has increased from ‘low’ in the ‘Measuring tax gaps 2021 edition’ to ‘medium’, due to a longer projection than previously, to allow sufficient time for 2018 to 2019 REP cases to be closed.

Avoidance

The large business avoidance estimate is derived from the ‘Measuring tax gaps 2021 edition’, behaviour breakdown in Corporation Tax for large businesses. This uses the same proportion of the tax gap attributed to avoidance from the previous publication for the latest four years. The proportion for 2020 to 2021 is the same as 2019 to 2020.

The avoidance estimates for mid-sized and small businesses are the same as they were in the ‘Measuring tax gaps 2021 edition’ for 2017 to 2018 onwards.

Historically, the avoidance estimates in Corporation Tax were derived from compliance cases in the same way that the marketed avoidance tax gap is estimated. In recent years, with methodological changes to the large and mid-sized business models, this has not been updated and for the ‘Measuring tax gaps 2022 edition’ we have used the same assumptions as last year.

Revisions

Large businesses

Figure 5.2 shows the revisions to the large business Corporation Tax net tax gap since the publication of the ‘Measuring tax gaps 2021 edition’.

The tax gap estimates between 2005 to 2006 and 2014 to 2015 remain static compared to the ‘Measuring tax gaps 2021 edition’. As compliance cases can take many years to close, the compliance yield of open cases is forecasted. Between publications, estimates are likely to be revised due to differences between forecast and actual compliance yield. For the ‘Measuring tax gaps 2022 edition’ the estimates for 2014 to 2015 and 2015 to 2016 have been revised upwards slightly.

From 2017 to 2018 onwards the estimates are projected to be lower, due to updated Corporation Tax liabilities.

Figure 5.2: Revisions to Large Business Corporation Tax gap since the ‘Measuring tax gaps 2021 edition’

Notes for Figure 5.2

1. MTG stands for ‘Measuring tax gaps’.

2. Tax gap estimates for 2017 to 2018 onwards are projected based on the trend in Corporation Tax liabilities.

Mid-sized businesses

Figure 5.3 shows the revisions to the mid-sized business Corporation Tax net tax gap since the publication of the ‘Measuring tax gaps 2021 edition’.

The tax gap estimates between 2005 to 2006 and 2014 to 2015 remain static compared to the ‘Measuring tax gaps 2021 edition’. As compliance cases can take many years to close, the compliance yield of open cases is forecasted. Estimates are likely to be revised between publications due to differences between forecast and actual compliance yield.

For the ‘Measuring tax gaps 2022 edition’ the estimates for 2015 to 2016 onwards have been revised upwards as cases closing for more yield than previously forecasted drives an increase in the tax gap. This happens as the compliance yield is used to derive the gross tax gap estimate.

Figure 5.3: Revisions to mid-sized business Corporation Tax gap since ‘Measuring tax gaps 2021 edition’

Notes for Figure 5.3

1. MTG stands for ‘Measuring tax gaps’.

2. Tax gap estimates for 2019 to 2020 and 2020 to 2021 are projected based on the trend in Corporation Tax liabilities.

Small businesses

Figure 5.4 shows the revisions to the small business Corporation Tax net tax gap since the publication of the ‘Measuring tax gaps 2021 edition’.

Figure 5.4: Revisions to small business Corporation Tax gap since the ‘Measuring tax gaps 2021 edition’

Notes for Figure 5.4

1. Figures for previous years have been revised.

2. MTG stands for ‘Measuring tax gaps’.

Generally, the tax gaps for the time series have been revised upwards due to the introduction of a UK-specific non-detection multiplier in all tax years. The long-term trend shows an increase in the gap over time, with a small jump in tax year 2017 to 2018 because of the beginning of the reformation of the Corporation Tax REP.

The inclusion of newly closed cases since ‘Measuring tax gaps 2021’ has led to changes in our tax gap estimates where the tax at risk differs from what we previously predicted.

From 2016 to 2017 and onwards the random sampling structure of the Corporation Tax REP was changed to only select small businesses. As a result, the small business Corporation Tax gap is now calculated using only small business data for 2016 to 2017 and onwards. For tax years 2015 to 2016 and earlier, data was collected using the previous small and medium enterprises population definition and was converted to the current structure using historical data on tax receipts that was available under both groupings. So, with our 3-year moving average approach, the estimate in tax year 2017 to 2018 is the final tax year where the conversion factor is applied, meaning that only the REP results in tax year 2015 to 2016 have been scaled down to exclude any medium enterprises.

Small corrections have also been made across the series of estimates following a review of imputation values for deselected cases, which has a greater impact on the tax gap for more recent tax years.

Go directly to other pages in this report:

• Tax gaps: Main findings
• 1. Tax gaps: Summary
• 2. Tax gaps: VAT
• 3. Tax gaps: Excise (including alcohol, tobacco and oils)
• 4. Tax gaps: Income Tax, National Insurance contributions and Capital Gains Tax
• 6. Tax gaps: Other taxes
• 7. Tax gaps: Illustrative tax gap by behaviour

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