Why Squeezing Big Business Harder Won’t Close the UK Tax Gap

If the UK government is serious about closing the tax gap, it can’t do so by repeatedly squeezing the same companies. There is a more effective path. And it runs through AI.

The UK tax authority, HM Revenue and Customs, has acknowledged that data analysis is central to its improved performance with large businesses. Its large business arm employs 2,500 staff to manage 2,000 of the UK’s largest companies, according to a National Audit Office report.

Large businesses account for just 12% of the overall tax gap. The other 88% falls on the small and medium-sized enterprise population, where HMRC’s reach is thinner, its tools blunter, and its results far less impressive.

The HMRC enforcement division employs 12,400 people to cover compliance for all individuals and small businesses, as well as wealthy and mid-sized firms. So while the tax authority found something that works and is leaning into it hard, it’s ignoring the wider business landscape.

Legacy IT systems are limiting HMRC’s capabilities, hence the £1.6 billion ($2.15 billion) earmarked in the Spending Review to modernize them. That investment is welcome. But it should be directed at improving the oversight of corporates that already have dedicated HMRC relationship managers, while also unlocking the vast, largely untapped tax gap across small and medium-sized businesses.

AI-powered tools applied to value-added tax returns, payroll data, and sector-specific corporate tax benchmarking would give HMRC the analytical firepower to identify noncompliance at scale without the need for the resource-intensive, hands-on model it uses for large businesses.

A targeted, technology-first approach to small and medium-sized business compliance would cost a fraction of the large business directorate, and the return on investment could be transformative.

A sector-by-sector strategy should be a core element of HMRC’s arsenal. Noncompliance is rarely random, clustering around specific industries, transaction types, and business models. Construction, hospitality, professional services, and retail all have their own compliance pressure points and risk profiles.

Such a strategy, informed by data and delivered through AI-assisted auditing, would be far more effective than the existing approach, which too often relies on self-disclosure or reactive investigation.

There is a harder conversation the National Audit Office report quietly sidesteps. The UK tax code has become impossibly dense. Most noncompliance among larger businesses isn’t willful. Instead, it reflects a system so layered with reliefs, amendments, and retrospective changes that even well-resourced finance and tax teams struggle to keep up.

Simplification isn’t a nice-to-have; it’s a precondition for compliance, and it deserves far greater attention than it now receives.

Successive layers of targeted reliefs, anti-avoidance provisions and policy reversals have created a system that is both complex and increasingly uncertain in its application. For large businesses operating across multiple jurisdictions, this uncertainty translates directly into cost through compliance and the friction that surrounds every significant commercial decision.

The Office of Tax Simplification, which closed in 2022, had limited impact. Its lack of legislative power meant that its recommendations were often set aside for political reasons. Any successor body would need genuine authority to make and implement change across the more than 1,000 reliefs that now litter the code.

Simplification shouldn’t be viewed as a revenue risk, as clearer rules, more stable legislation, and reduced reliance on subjective interpretation would improve compliance outcomes. It would also free up HMRC resources that are now being absorbed in dispute resolution, and send a clear signal to internationally mobile capital that the UK is a jurisdiction that competes on certainty and administrative efficiency, not just headline rates.

Large businesses aren’t a captive audience. Quadrupling penalties, intensifying scrutiny, and creating a relationship that increasingly feels adversarial rather than collaborative are actions that have consequences. Companies with strategic flexibility will factor the UK’s tax environment into decisions about where to domicile, invest, and grow.

HMRC has built something genuinely effective in its large business directorate. Its task now is to use technology to replicate that impact at scale and treat tax simplification as a strategic priority, not an afterthought.

Raising revenue and retaining the businesses that generate it aren’t competing goals. But right now, the balance is tilting in the wrong direction.

This article does not necessarily reflect the opinion of Bloomberg Industry Group Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Jenny Batchelor is a principal in corporate tax at Ryan, a global tax services firm.

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