THE RICHARD J MURPHY YOUTUBE CHANNEL
DEBATE AMMUNITION
THE SMALL COMPANY TAX GAP
Funding the Future | July 2026
Today's Topic
The small company corporation tax gap, and why it is out of control.
The video that this Debate Ammunition supports is available here.
The Core Argument
Small companies in the UK are failing to pay £17.3 billion of corporation tax a year, almost half of everything they owe, because HM Revenue and Customs has withdrawn from active enforcement and Companies House lets abusive companies disappear from the Companies Register without consequence. This is not a marginal loss; it is the single largest and fastest growing element of the UK tax gap, and it is entirely avoidable.
Key Statistics
| Statistic | Figure | Source |
|---|---|---|
| Total UK tax gap, 2024 to 2025 | £59.2 billion | HMRC tax gap statistics |
| Corporation tax gap, total value | Up from around £4.5 billion a decade ago to £21 billion now | HMRC tax gap statistics |
| Small company corporation tax gap | £17.3 billion unpaid out of £38.7 billion owed, or 44.8 per cent | HMRC tax gap statistics |
| Active companies on the UK register | Grown from under 4 million in 2016 to nearly 5.8 million now; around 800,000 dissolved each year | Companies House data |
The Argument Structure
Step 1 — The overall tax gap is being driven by one thing:
HMRC's headline claim that the tax gap is broadly flat as a percentage of tax owed, at £59.2 billion in 2024 to 2025, hides a divergence. VAT compliance has genuinely improved, but that improvement is being cancelled out by the corporation tax gap, which has risen from around £4.5 billion a decade ago to £21 billion now, or roughly 18 per cent of all corporation tax owed.
Step 2 — Small companies are the epicentre of that failure:
Large and medium sized businesses broadly pay what they owe. Small companies do not: £17.3 billion of the £38.7 billion of corporation tax owed by small companies, 44.8 per cent of the total, goes unpaid. That figure has grown from around £1.2 billion in 2012 to £17.3 billion now, an exponential rise concentrated entirely in this one part of the economy.
Step 3 — This is a structural failure created by policy choices, not an accident:
Since local tax offices were closed and on-site inspection ended around 2010, the number of active companies on the UK register has grown from under 4 million in 2016 to nearly 5.8 million now, with around 800,000 dissolved every year, most without ever filing accounts or a corporation tax return. Companies House lets them vanish from the register with the debt uncollected, which is the government facilitating the abuse, not merely tolerating it.
Step 4 — The legislative fix already exists:
Richard wrote two parliamentary bills, presented by the late Michael Meacher MP in 2013 and 2014, that would have pierced the veil of incorporation, making directors and shareholders personally liable for tax deliberately avoided, and required banks to report company account data to HMRC and Companies House each year. Jacob Rees-Mogg talked both bills out. Recovering this money, enough to fund 50,000 council houses a year and more besides, requires enforcement, not a new tax.
Their Argument → Your Rebuttal
| They Say | Your Response |
|---|---|
| The tax gap as a percentage of tax owed has stayed broadly flat, so the system is basically working. | That flat headline hides the real story. VAT compliance has genuinely improved, but that improvement is masking a corporation tax gap that has gone from £4.5 billion to £21 billion. And remember, HMRC is marking its own homework here. |
| Small business owners aren't criminals, most of this is just late filing or firms that simply fail. | Almost one pound in every two owed by small companies now goes unpaid, and that failure rate has climbed relentlessly since HMRC closed local tax offices and stopped inspecting small firms around 2010. That is a pattern of exploitation, not an accident. |
| Piercing the corporate veil undermines limited liability, which is essential for enterprise. | Limited liability is a privilege granted by society, not a right, and it was never meant to shield deliberate tax evasion. The bills only targeted directors and shareholders who set companies up with the intention of avoiding tax owed. |
| You can't actually be sure that legislating would recover anything like £17 billion. | That figure is not a guess. It is HMRC's own published tax gap data. And it has grown from £1.2 billion in 2012 to £17.3 billion now precisely because nothing has been done to stop it. Leave it alone and it will keep growing. |
The One-Liner
“Small companies in Britain are refusing to pay £17.3 billion of corporation tax a year, and the government is letting them get away with it.”
Further Reading
| Title | Date | Relevance |
|---|---|---|
| How to end phoenixing now | 12 September 2025 | Sets out the case against limited liability abuse and directors dodging tax through repeated company dissolution, the mechanism behind the small company tax gap. |
| HMRC have deliberately taken tax collection out of our communities and the price that we are paying for that is very high | 21 February 2024 | Explains how the closure of local tax offices from 2011 onwards drove the growth in small company tax abuse. |
| HMRC have marked their own homework on the tax gap again and have awarded themselves a nice mark, as usual | 23 June 2023 | Background on why HMRC's own tax gap figures should be treated with suspicion, and the case for independent scrutiny. |
| Why can HM Revenue & Customs restate its account for the tax gap fourteen times in fourteen years? | 20 February 2024 | Detailed critique of the reliability of HMRC's published tax gap data over time. |
| Are HM Revenue & Customs intent on making the right amount of tax as hard as possible? | 19 March 2024 | Sets out the scale of the small company corporation tax gap and the case for reinvesting in HMRC compliance work. |
About Richard Murphy
Richard Murphy is a political economist, emeritus professor of accounting practice at Sheffield University Management School, a former professor of international political economy and, for 42 years, a practising chartered accountant. As a tax justice campaigner, he created country-by-country reporting which is now legally required for multinational corporations' tax reporting in more than 70 countries around the world to tackle tax haven abuse. He is one of the UK's most widely read heterodox economics bloggers. He is the author of the Funding the Future blog and runs the Richard J Murphy YouTube channel, which has more than 375,000 subscribers. He co-founded both the Tax Justice Network and the Green New Deal.
You Can Find Richard At:
- Blog, Funding the Future blog
- Twitter/X, @richardjmurphy
- Bluesky, @richardjmurphy.bsky.social
- YouTube, Richard J Murphy YouTube channel
Publishing Data
© Richard Murphy 2026. Richard Murphy has asserted his right under the Copyright, Design and Patents Act 1988 to be identified as the author of this work.
Any part of this work may be shared if no charge is made for doing so and so long as accreditation is given, and no part has been altered. Those wishing to reproduce the work in pursuit of profit must seek permission to do so from the publisher: Tax Research LLP, 33 Kingsley Walk, Ely, Cambridgeshire, CB6 3BZ. Registered at that address. Registered number OC316294
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[…] Supporting data for this video is available here. […]
Having been in a small legit family company many years ago, I found it terrifying to narrowly headline deliberate Limited Liability tax abuse and avoidance of other liabilities as broadly being, Small companies in Britain etc etc, Could it be possible to headline the absolute real problem with dodgy LLC small or larger companies so not to inadvertently tar legit small companies (some successful, some struggling) with the same brush. I realise you always cover it later in your explanations of the inadequate control over LLC issues though.
The problem is with smaller companies now. Large companies have been controlled via things like country-by-country reporting, which I created. Being honest helps.
A quick trawl at Companies House leads me to suspect that I worked for such companies, we got transferred to the new Co and payroll number remained same, 2 years later the old one got dissolved. They are still in business, hopping between two addresses. I was on minimum wage, on PAYE. All the accounts they submitted were unaudited as far as I can see.
The risk would be increasing inequality of opportunity to start a business.
Investors are already protected by limited liability. A poorer innovator firstly has to give up significant equity to an investor to start the business, and/or provide personal guarantees to get business loans (even British Business Bank backed loans generally require a personal guarantee and their protection is for the benefit of the bank rather than the innovator).
The result is that innovators don’t have limited liability already, and unless they’re wealthy they often aren’t even the main beneficiary of their idea in the end. Meanwhile, investors have fully limited liability.
Adding HMRC liability to the directors would put more risk on the innovator and not on the investor. This would mean wealthy innovators (who can be both the investor and the innovator) would have some additional risk but one they should be able to afford and sufficient benefit to take the risk. Poorer investors would have a higher risk that they can ill afford if they’re already putting their house on the line for other business loans.
To me the question is how best to ensure investors do not have the opportunity to extract profit at the expense of creditors including HMRC, and perhaps how to ensure they cannot either extract false profit or prioritise repayment of any of things like directors loans to eliminate their downside risk at the expense of creditors.
My proposal is not intended to penalise genuine entrepreneurs or increase barriers to innovation.
The purpose is to distinguish between honest business failure and abuse of limited liability.
If directors have acted honestly, maintained proper records and treated creditors fairly, they should have little to fear. My concern is with those who repeatedly use limited liability to externalise losses onto HMRC and other creditors whilst extracting value for themselves.
I also agree that the role of investors deserves much greater attention. Too often the financial structure of companies allows returns to be extracted whilst risks are shifted onto employees, suppliers, taxpayers and other creditors.
The law should certainly prevent directors’ loans, artificial dividends and similar mechanisms being used to strip value from failing companies before creditors are paid.
The broader point is that limited liability is a privilege granted by society because it is assumed to generate wider economic benefit. Where it is abused, society has every right to attach conditions to that privilege.
So I do not see this as a choice between encouraging entrepreneurship and protecting creditors. A well-designed regime should do both by rewarding honest risk-taking whilst making abuse much more difficult.
My feeling is that this ‘small company’ abuse has been going on for quite a long time.
In the 1990’s, when being a computer programmer meant I could simply walk into jobs, I went ‘contracting’ and was advised, and did, set up a company through which to work – this loophole was rightfully later closed via IR35 because it was clearly disguised employment (unless of course you were the director of the BBC, to chich I was told, it didn’t apply) . Anyhow, long story short, on one of my first contracts, another contractor told me that I ought consider dissolving the company and thus avoid paying any tax what so ever…. I didn’t, as it happens, as I felt that was a step too far.
Agreed.
I have been writing about it for decades, but it is getting worse
In my first job (some 36+ years ago) I worked for the special projects division of a global engineering busness. As far as I could work out at the time apart from myself, my direct line manager and the division director all the other engineers (of which there were many) were contractors set up as single director/employee limited liability businesses. Their main focus, on which they seemed to devote a lot of time, was minimising their tax exposure i.e., maximising their take home through small income and director dividends, etc. All were earning much more than I did at the time, which I was ok with as they had more experience. What I did not like was them proudly telling me that despite being paid more they also paid less tax and that I was nuts to be an employee. Many of them had been there for longer than my line manager but had no loyalty to the business other than ensuring their contacts got renewed. As they held most of the engineering knowhow in their heads this gave them great bargaining power at contract renewal. I, maybe naively, felt this contractor business model left my employer and therefore me as an employee of the business exposed should they leave for pastures new. Fresh out of college/university, I was interested in developing my engineer design skills at that point of my career which being contractors they were reluctant to support as they felt management had brought me in to extract their knowhow. Management however were planning for me to move into management so felt engineering design knowhow was not so important. I thought this was all nuts. I left within a year.
You were right to go.
That was a hostile environment