HMRC collects extra £3.4bn from SMEs following VAT enquiries

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In order to maximise its revenue from compliance investigations, HMRC is putting increasing pressure on small and medium sized businesses. As a result, many businesses could be at risk of enquiries into their tax filings.

For example, data recently disclosed by HMRC shows they collected £3.4bn in extra tax through analysis into SMEs for underpaid VAT alone.

Revenue from compliance investigations into SMEs has remained high and this is likely to continue as HMRC puts the tax returns of SMEs under greater scrutiny. VAT revenue accounted for almost half (49%) of the additional tax take from inspections into SMEs – an even higher proportion than last year (45%).

As VAT can generate considerable extra revenue for HMRC, we can expect the number of enquiries into SMEs to remain at a high level.

This is especially the case given the impending introduction of the Criminal Finance Act (CFA) in September 2017. The CFA will make it possible for HMRC to prosecute companies that fail to prevent staff, agents or contractors from assisting or encouraging tax evasion. This will, therefore, widen the range of targets for the HMRC.

HMRC’s enquiries can be costly, disruptive and stressful for SMEs, especially for those who do not have contingency plans in place to deal with a long tax investigation. In order to avoid such enquires, and subsequent fines from the taxman, SMEs must ensure they are fully compliant. If in doubt, company directors should seek professional help from an accountant.

To maximise its future revenue, HMRC will also look to use other tools at its disposal. This may include use of its Connect database and taskforces to identify those it suspects may be underpaying on their tax, as well as more aggressive tactics such as Accelerated Payment Notices (APNs) and property raids.

SMEs should be aware that even simple errors on a tax return can be a red flag to HMRC and can lead to an enquiry.

With HMRC set to ramp up investigations following the introduction of the CFA, more and more businesses are taking out Tax Investigation Insurance to protect themselves.