- HMRC concluded a quarter of a million investigations into small businesses and individuals last year – recovering £6.3bn
- Small businesses are struggling to comply with increasingly complex tax rules
- UK small businesses spent 242 million hours on tax admin in total last year
HMRC has increased its take from tax investigations into individuals and small businesses by 23% over the past year to an average of £24,700 per investigation, up from £20,100 the previous year, says UHY Hacker Young, the national accountancy group.
HMRC closed 255,000 investigations into small businesses and individuals last year, recovering £6.3bn in additional compliance yield.
Phil Kinzett-Evans, Partner at UHY Hacker Young says that the increase in amount of revenue generated from tax investigations is partly due to the increased complexity. For example, significant changes to the way buy-to-let investments are taxed (eg mortgage interest) have led to confusion amongst amateur property investors.
The rise in tax take from investigations into small businesses is also rising as their tax rules are becoming increasingly complex and time consuming, says Phil Kinzett-Evans, Partner at UHY Hacker Young.
He says:
“Many small businesses don’t have the capacity to deal with the level of detail and box-ticking required to submit complex tax returns, so it is no surprise they are making more mistakes.”
The Corporation Tax 600 form, used by small companies to disclose their tax liability to HMRC, has more than 200 boxes that may need to be filled. In addition, there are 12 supplementary forms that may also need to be completed, each with more boxes to fill in.
Phil Kinzett-Evans adds:
“Most small businesses want to pay their fair share but tax rules hit them disproportionately hard compared to large firms. Too often tax rules are written as if every business has an accountant, which is far from true.”
Small businesses are forced to spend a huge amount of time dealing with tax compliance, which translates into significant costs. Small businesses spend an average of £4,500 a year on tax compliance, equivalent to 44 hours or 242 million hours across the UK.
Some tax rules, such as the requirement to make quarterly VAT payments, adds additional strain on small businesses and increases the risk of misreporting their income to HMRC.
Phil Kinzett Evans explains:
“A good month of sales at the end of the quarter can trigger a large VAT bill that must be paid before the revenue has been fully collected sometimes. That pressure can lead some to under-declare income simply to meet their tax bills.”
Businesses should push back on HMRC penalties
Small businesses that receive penalties from HMRC should challenge them if they believe they have complied properly, particularly in grey areas. However, they must make sure they do so on technical grounds – challenging HMRC on how their tax rules should be interpreted rather than simply arguing a penalty is unfair.
Business expenses HMRC sees as personal are a common area of dispute but small businesses can challenge that with the right evidence. The same applies to repairs or refurbishment costs that get treated as capital, meaning they cannot be deducted immediately for tax purposes.
Small businesses must agree a payment plan with HMRC before it’s too late
Small businesses should consider setting up a Time to Pay arrangement with HMRC. Without Time to Pay agreements, hefty penalties that need to be paid in one go can force small businesses to sell assets to cover the cost.
Phil Kinzett-Evans says:
“Fines and tax bills from HMRC can reach tens of thousands of pounds, so small businesses must agree a payment arrangement as early as possible. Otherwise, they risk having to sell valuable assets just to keep going.”
