October 26, 2012 - Rachel Miller

Small firms targeted as HMRC steps up investigations

The tax yield from compliance investigations into small and medium-sized businesses by HM Revenue & Customs (HMRC) jumped 39% in the last year, according to national accountancy group UHY Hacker Young.

Investigations into SMEs netted HMRC £434 million in extra tax and fines in 2011-12, a sharp increase from £311 million in 2010-11 (year end March 31). These figures are in addition to taxes already paid by these businesses.

In particular, it says HMRC is targeting small firms with a "low cost, high return" strategy and it adds that the crackdown is hitting innovative growth businesses.

Roy Maugham, tax partner at UHY Hacker Young, said: "HMRC has been set a challenging tax yield target by the Chancellor, and small businesses have found that they are an easy target for HMRC's crackdown. 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."

Maugham adds: "The other hidden cost to businesses is the amount of time it takes to deal with a tax investigation. An SME is also going to find it hard to afford a full time accountant to deal with or challenge a tax investigation so is more likely to concede, unnecessarily, to demands for extra tax."

UHY Hacker Young says that HMRC has been targeting tax areas that have previously been relatively overlooked, in an attempt to increase tax revenue.

Roy Maugham said: "Areas like PAYE and VAT have always been scrutinised to an extent, but HMRC is now looking more closely at issues like corporate entertainment and employee benefits — such as company cars, private healthcare, or company-subsidised fuel costs — which had previously escaped serious scrutiny.

"HMRC's take on employee benefits is increasingly draconian. They're looking for any minor compliance slip by a business: whether it has reported the right thing at the right time, or challenging whether company cars are genuinely being used for company business at any given time."

"Small businesses need to be aware of this when completing their tax returns. The days of HMRC having a relaxed approach to assessing deductions are long gone."