U.K. tax gap remains at 5.3% as Chancellor prepares for Autumn Budget

The UK's tax gap remains at 5.3%, or £47 billion, for 2023/24, according to Deutsche Bank, exacerbating Chancellor Rachel Reeves' £25 billion fiscal hole. With significant shortfalls in small business corporation tax and excise duties, the Chancellor is expected to continue her strategy of enhanced tax collection. Deutsche Bank anticipates the upcoming Autumn Budget will target an additional £1-1.5 billion through measures like increased compliance staff and modernized HMRC systems, underscoring an ongoing focus on closing the tax gap to address the fiscal shortfall.

Analysis

According to a Deutsche Bank analysis, the United Kingdom's fiscal position is challenged by a persistent tax gap of £47 billion, or 5.3% of theoretical liabilities, for the 2023/24 fiscal year. This contributes significantly to a projected £25 billion fiscal hole that Chancellor Rachel Reeves must address in the upcoming Autumn Budget on November 26. The largest shortfalls are concentrated in corporation tax from small businesses, excise duties from tobacco, and self-assessment receipts from business taxpayers. Following a historical precedent where Chancellors have raised an average of nearly £1 billion per fiscal event since 2012 through collection efforts, and with Reeves having already initiated over £6 billion in such measures, Deutsche Bank anticipates a further £1-1.5 billion will be targeted. The expected mechanisms include increasing HMRC compliance staff, modernizing tax collection systems, and a more aggressive stance on tax fraud, signaling a clear policy focus on enforcement to bolster national revenue.

Key Decisions for Investors

• Investors should monitor UK-domiciled small-cap companies and firms in sectors with high excise duties, such as tobacco, as they face potential headwinds from increased tax enforcement and compliance costs.
• The government's focus on closing the fiscal gap through enhanced tax collection, rather than immediate broad-based tax hikes, could imply a more stable tax environment for large, compliant corporations but heightened risk for those with aggressive tax strategies.
• Opportunities may arise for companies specializing in tax software, data analytics, and digital transformation services, as they are positioned to benefit from government investment in modernizing HMRC's tax receipt and compliance systems.