The £59.2 billion tax gap: why HMRC is moving the UK to Making Tax Digital.

Ask a sole trader or landlord about Making Tax Digital (MTD) for Income Tax and you may hear a mixture of frustration and confusion. Why is HM Revenue & Customs (HMRC) asking independent business owners to change how they manage their taxes?

One important reason is the tax gap: the difference between the tax HMRC estimates should be paid and the amount actually collected. Digital records and more regular reporting are intended to reduce avoidable mistakes. They are part of the response, rather than a solution to every cause of missing revenue.

What is the UK tax gap?

HMRC’s June 2026 publication puts the provisional tax gap for 2024–25 at £59.2 billion, or 6.4% of theoretical tax liabilities. That means HMRC estimates it collected 93.6% of the tax due.

You may have seen the earlier £46.8 billion headline for 2023–24. That was published in 2025 and has since been revised to £52.8 billion. Tax-gap figures are estimates, and new information or changes to methodology can alter them.

These figures cover the wider tax system, not just Income Tax paid by sole traders and landlords. Read HMRC’s latest tax-gap announcement for the headline figures and revisions.

The small-business breakdown.

Small businesses account for the largest share of the tax gap by HMRC customer group. In the latest estimates, that share is 62% for 2024–25, compared with 58% in 2020–21.

That does not mean 62% of small businesses are doing something wrong. It describes the group’s share of the estimated missing tax. It also spans different taxes and business structures, so it should not be treated as an estimate of the amount MTD for Income Tax alone can recover.

Error matters—but it is not the whole story.

HMRC’s illustrative breakdown by behaviour shows why better records are part of the discussion:

The first two categories add up to 51%. That is a substantial share, but it does not make evasion irrelevant or prove that every mistake can be fixed by software. Other categories include non-payment, legal interpretation, criminal attacks, and the hidden economy.

HMRC describes these behaviour estimates as illustrative. They are useful broad indicators, rather than precise measures of individual taxpayers’ intentions. See the behaviour breakdown.

How Making Tax Digital is intended to help.

Leaving a year’s paperwork until the last minute can make it harder to spot a missing receipt, a duplicated entry, or an expense assigned to the wrong business. A regular routine can help you identify questions while the details are still fresh.

• Digital records: Businesses within MTD keep the required records digitally. You can still retain paper receipts as evidence, but paper records alone do not fulfil the digital-record requirement.
• Connected information: Compatible software and the required digital links can reduce repeated copying between systems. Spreadsheets remain an option with appropriate bridging software.
• Quarterly updates: Regular summaries encourage an ongoing record-keeping routine. You still review your figures and submit a year-end tax return through compatible software.

In a July 2025 parliamentary answer, the government said MTD for Income Tax was expected to generate £1.95 billion in additional tax revenue by 2029–30 through reduced errors. That is a forecast, not revenue already recovered or a promise that the entire tax gap will disappear. Read the parliamentary answer.

What this means for your business.

The practical starting point is your own obligations. The first mandatory MTD group started on 6 April 2026: generally, individuals with qualifying self-employment and property income above £50,000 in 2024–25, unless an exemption applies. Our qualifying-income guide explains how to check.

HMRC is not applying penalty points for late quarterly updates during 2026–27, but the updates are still required. Annual-return and payment rules continue to apply. See HMRC’s penalty guidance.

Less repeated admin, more control.

Avona helps bring connected bank transactions into one place for review and categorisation. That can reduce rekeying and make it easier to keep your records organised through the year.

A bank feed cannot tell you everything about a transaction or guarantee that an expense is allowable. Keep your supporting documents, add anything the feed has missed, and check the figures before submitting. Software helps with the process; your review still matters.

Explore Avona for sole traders or Avona for landlords to find a simpler way to manage your records.

Further reading.

• HMRC: Measuring tax gaps 2026 summary
• HMRC: Using Making Tax Digital for Income Tax