In order to maximise revenue, HMRC is stepping up investigations into small and mid-sized enterprises (SMEs). As a result, more and more SMEs are now at risk of an inquiry from the taxman.
New data shows that HMRC collected £504m in extra tax from investigations into the tax affairs of SMEs last year, an 8% increase on the £468m it collected in 2015/16.
This increase reflects HMRC’s increasingly aggressive stance towards smaller businesses as it faces pressure from HM Treasury. Last year, HMRC collected £28.9bn through all of its compliance activities, up 40% from the £20.7bn it collected five years ago.
SMEs are often viewed as an easier target by HMRC as they are unlikely to have the resources to employ in-house tax specialists who can close down or limit tax investigations.
In the past, HMRC has typically targeted cash-only SMEs in its compliance investigations, such as restaurants, bars and other retailers, as they are more likely to under-declare their income.
However, HMRC is broadening the types of businesses it attacks – now non-cash businesses are increasingly likely to be investigated.
To do this, HMRC is making use of the Card Transaction Programme, introduced in 2013, which tracks payments received by SMEs through debit and credit card transactions. The data is then cross-referenced with HMRC’s Connect database.
This helps HMRC identify any discrepancies between what income SMEs receive and what they actually report to HMRC. Any inconsistencies are flagged for investigation.
Consequently, business owners should be aware that even simple errors on a tax return can be a red flag to HMRC and could lead to an investigation.
Tax investigations can be costly, disruptive and stressful for SMEs, and may even result in long-term reputational damage.