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HMRC tax investigators increasingly targeting small firms

October 23, 2012

New research published by a leading accountancy firm shows that HMRC has ramped up its investigation efforts into smaller enterprises, as the yield from compliance activities into SMEs soared by almost 40% in the last tax year.

The information, published by UHY Hacker Young this week, showed that the the total sum raised by HMRC from SMEs during 201112 from extra tax and fines reached £434m in 2011/12 compared to a mere £311 in 2010/11 – a rise of 39%.

This revenue is in addition to the taxes already paid by the businesses which have been the subject of investigations.

Commenting on his firm’s findings, Roy Maughan (tax partner) said that HMRC had been given a ‘challenging tax yield target’ by the Treasury, and small enterprises were an easy target for investigations at a time when many firms are struggling to survive the economic downturn:

“Small businesses are more likely to make innocent errors in their tax calculations than larger businesses, meaning the small business community offers plenty of opportunity for HMRC.”

Maughan points out that the extra tax and fines are a direct cost for businesses, but there are also a number of ‘hidden costs’ – particularly the time it takes to deal with an investigation, as well as the stress that can be caused.

“Add this to HMRC’s tactic of sending multiple demands for additional payment for different taxes simultaneously to the same business, and small businesses can very quickly find themselves overwhelmed by the compliance burden.”

According to the accountancy firm, HMRC has turned to new tax areas to raise revenue. Areas such as VAT and PAYE are traditional areas for HMRC to scrutinise, but the tax authorities are now looking at less obvious areas such as company cars, private healthcare and other employee benefits.

The firm says that HMRC are being ‘increasingly draconian’ when it comes to punishing mistakes made by small businesses – such as reporting changes to an employee’s tax status late, or checking whether a company car is genuinely being used for business purposes at a given moment in time.