HMRC is poised to ramp up investigations into small businesses after revealing that it suspects them of underpaying 42% of the total amount of tax underpaid last year – the most of any taxpayer group.
The Government’s official “Tax Gap” figures show that HMRC suspects small businesses of underpaying £13.7bn in tax out of an overall total of £33bn underpaid last year. This is more than the suspected amount underpaid by large and mid-sized businesses combined (£10.9bn).
The Tax Gap is the difference between the amount of tax that should in theory be collected by HMRC and what is actually collected. These annual estimates can be a good indicator of where HMRC is likely to focus its future investigations in order to boost its tax take.
Crucially for small businesses, HMRC revealed that it thinks 22% are filing incorrect tax returns each year. This is a worryingly high figure and means that HMRC could potentially investigate one in five of the tax returns it receives from small businesses, putting many at immediate risk of an investigation.
Additionally, if HMRC starts to suspect that a larger proportion of smaller businesses are filing incorrect tax returns, then it may start investigating even more cases.
HMRC is likely to ramp up the number of investigations into individuals as well – the suspected underpayment of personal taxes has increased by 17% in the last year alone to £3.4bn, up from £2.9bn in 2015/16.
Small businesses and individuals have long been a target for HMRC as they often do not have the resources to defend themselves in investigations. In comparison, larger businesses often have in-house legal teams, or the resources to hire experts, that can negotiate with tax inspectors and limit inquiries.
With HMRC looking to increase its annual tax take, both individuals and businesses need to be more careful than ever about their tax affairs and review their current arrangements.