Every week we take a look at what is trending in the accountancy and tax press and share items that we think will interest you. However, these are only outlines and where they relate to tax planning should not be acted upon without looking into them more completely as everyone’s circumstances are particular to them. You need to take specific advice appropriate to your own circumstances.

While every effort is made to deliver accurate, informative and balanced articles this content is general in nature and should not be used as the sole basis for making decisions.

 

The Tax Gap

HMRC estimates that it collects 94.7% of all tax due.

The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and the amount that is actually paid.”

The government official statistics show that this is now approaching £50bn.

Over the past 20 years the VAT tax gap has dropped from 13.8% to just 5%, while losses due to income tax, national insurance contributions (NICs) and capital gains tax have almost halved in the past decade to 3%.

The real problem centres around corporation tax, where the gap has risen from 6.4% a decade and a half ago to 15.8%.

Small business accounts for 60% of the gap. The problem here is that collecting relatively modest amounts from small businesses often requires far greater effort.

Rachel Reeves is currently in the process of beefing up HMRC so expect more attention to closing the small business tax gap.

Overall, the share of the tax gap attributed to small businesses has increased over the last five years, from 48% of the overall tax gap before the pandemic in 2019-20 to 60% in 2023-24, amounting to £28.08bn in tax in 2023-24, revealed latest HMRC Tax Gap figures.

The £28.08bn small business figure is split between various taxes but is mainly corporation tax.

This high incidence of non-compliance, errors and failure to pay by small businesses with turnover below £10m, was the same in 2022-23, highlighting a major problem with poor compliance by small and micro companies, personal service companies and sole traders,

 

HMRC has side hustlers in the spotlight

Once you earn over £1,000 through a side hustle you will need to register with HMRC so you can file a self-assessment tax return before the end of January 2026.

A side hustle can come in many forms, from creating monetised content, dog walking, selling products via online platforms like Etsy, and property rental. It also includes gains made on cryptocurrency assets.

HMRC predicts that up to 65% of side hustlers are unaware that they should be registered for tax.

 

Exit Plans on Hold

A recent survey has found that 44% of business leaders have postponed their exit plans because of the changes to Business Property Relief and Capital Gains Tax.

On the other hand, 40% have fast tracked their plans before another potential tax raid at this year’s Autumn Budget and a significant number are actually trying to exit before the changes to Business Property Relief coming in in April 2026. 20% are saying they are bringing forward their plans as they are worried about the increase in Capital Gains Tax.

This reflects the level of anxiety felt by those coming towards the end of their careers and looking to exit. Do they speed up the exit or push it back a bit to see if the tax regime becomes more favourable.

 

Companies House Changes – Accounts Filing

There is as yet no timetable for the move to require all companies, regardless of size, to file a balance sheet and profit and loss account. This will be a major change for small businesses so it is likely that there will be a reasonable lead time before this in introduced as a mandatory requirement in the Economic Crime and Corporate Transparency Act 2023.

However, these accounting reforms will be part of a radical overhaul of the current financial reporting and accounting framework for all businesses, with small and micros most affected.

The changes include:

1. mandate software-only filing for all accounts
2. remove the option for small companies and micro-businesses to file abridged accounts;
3. require all companies to file profit and loss accounts, helping to improve the financial information on the register – and require small companies to also file their directors’ report;
4. require a company claiming an audit exemption to provide an enhanced statement from their directors on the balance sheet, specifying the exemption being claimed and confirming the company is eligible for it; and
5. limit the number of times that a company can shorten its accounting reference period.

Changes that are already scheduled include:

By summer 2025, Companies House should be able to:

• receive and assess applications from individuals seeking to suppress their day of birth for documents registered before 10 March 2015, signature, business occupation, and residential address in most other instances.
• allow access on request to certain trust information on the Register of Overseas Entities.

By autumn 2025:

• identity verification will be made a compulsory part of incorporation and new appointments for new directors and personal service companies (PSCs).
• begin the 12-month transition phase to require more than seven million existing directors and PSCs to verify their identity – the identity verification will happen as part of the annual confirmation statement filing.

By spring 2026:

• make identity verification of the presenters a compulsory part of filing any document.
• require third party agents filing on behalf of companies to be registered as an authorised corporate service provider (ACSP) including accountancy and law firms.
• reject documents delivered by disqualified directors as they will be prohibited from doing so, unless they are delivered by an ACSP for specified filings permitted by law.

By the end of 2026:

• require all limited partnerships to submit more information, providing greater transparency for users of the register.
• complete the transition period for all individuals on the register requiring identity verification and start compliance activity against those who have failed to verify their identity.
• facilitate greater cross-checking of information and data between Companies House and other public and private sector bodies.

 

Business Exodus

A recent survey suggests that 42% of entrepreneurs are saying the changes in the last budget are putting them off from starting their own business in the first place, while 47% that already have thriving businesses shared they are reluctant to grow their business further because of the government’s policies.

Additionally, further changes to the capital gains tax rates at the next Budget has the potential to deter 45% of entrepreneurs from starting their first business.

It appears that many business owners don’t consider the government to be supportive of entrepreneurs.

Inheritance tax (IHT) is being changed for farmers and business owners from next year, and  43% said if the government decides to restrict IHT reliefs further it would make them consider leaving the UK all together.

Changes to IHT, due to be introduced from next April, will make it more costly to pass businesses on to the next generation, which could force business owners to shelve plans for job creation, innovation and growth.’

 

Food VAT legislation

Tax barrister Max Schofield, from Devereux Chambers, frequently represents food companies at tax tribunals and he has outlined his views on the current issues with the VAT system when it comes to food saying, ‘it doesn’t work’.

He says food and the way it is taxed has brought with it confusion since it was introduced, using the example of cod liver oil. Is it a food or a drug?

40 years ago it was decided that purchase tax at the time, will not be charged on the sale of cod liver oil because it was a food. In the VAT tribunal the revenue have now argued the exact opposite, saying this was not food and should be subject to VAT.’

This illustrates how views on the way food is taxed are fluid depending on the opinion of someone in a position to argue.

Skinade is a collagen drink deemed to be subject to VAT not because of the contents of the product, but the way it had been marketed because the product claims to be ‘good for healthy skin’ in its advertising campaigns. The tribunal said food would not be sold to improve someone’s appearance. However. doesn’t a lot of food contribute to how you look? Doesn’t water help your skin and appearance? Does drinking coffee to keep me awake stop it being a drink? What purposes are allowed?’

A biscuit is deemed a biscuit in the eyes of HMRC, depending on the layers and the contents. If you put a layer of chocolate covering the top it becomes standard rated, however, you put another biscuit on top of that layer, it forms a sandwich and goes back to being zero rated.

Flavoured rice cakes are standard rated while lightly salted or unflavoured ones were exempt. Chocolate Nesquik powder is zero rated while strawberry is standard rated.

It seems to me that VAT, introduced on All Fools Day in 1973 lacks logic and a dose of common sense. But it keeps tax lawyers in a job.

 

10,000 Companies – ‘Illicit Activities’

Companies House and the Insolvency Service have worked collaboratively to shut down thousands of companies thought to be involved in ‘illicit activities’, such as using fraudulent information to incorporate businesses in the UK.

The two working together have managed to catch up with 30 entities that had incorporated 30,000-50,000 companies they considered to be involved in ‘illicit activities’. 10,000 are in the process of being removed from the register.

They have managed to identify around £50m in UK property related to organised criminals in which asset recovery investigations are taking place.

Along with this, there are thought to be over 100,000 shell companies that have been formed over the last 20 years and are ‘known to be involved in a number of illicit activities’. The Insolvency Service is in the process of investigating these to wind them up and refer them to Companies House to be dissolved.

 

Questions?

If you have any questions about any of these, you know where to find us. If you prefer, just give me a ring on 07770 738770 or email me at alan.long@thelongpartnership.co.uk.