This article was first published in the June 2018 UK edition of Accounting and Business magazine.

Small and medium-sized businesses in the UK may be forgiven for beginning to feel slightly paranoid that someone is out to get them – and that someone is the taxman. Over the past few years, stories have appeared regularly in the business press highlighting the growing tax yield that HMRC is gathering from SMEs. More than one headline has suggested that HMRC has ‘SMEs in its sights’, on the basis that smaller companies are less likely – and less able – than larger companies to push back against tax investigations.

But is this really the case? Let’s begin with the figures. According to UHY Hacker Young, HMRC collected an additional £474m in corporation tax from small firms as a result of avoidance investigations in 2016/17, a 5% increase on the previous year. The firm points out that additional corporation tax raised from investigations into large companies fell by 25% in 2016.

Figures obtained by online finance platform Funding Options show a 21% rise in the number of attempts made by HMRC to shut down small businesses for unpaid taxes in 2017: 4,710 winding-up petitions were sent out to business owners during the year, compared with 3,906 in 2016 – a five-year high.

And tax investigation specialist PfP says an extra £3.4bn in underpaid VAT was collected by HMRC from small firms in the year to April 2017, accounting for 49% of the entire additional tax take, compared with 45% the year before.

When all this is pulled together, it suggests a greater level of interest from HMRC in the tax affairs of SMEs. The question, though, is whether this focus is intentional or a consequence of HMRC’s new ways of working.

The UK’s tax gap – the gulf between the tax that is due and the tax that is collected – has been a matter of concern for successive governments. In his spending review in 2010, the then chancellor, George Osborne, set a target to increase tax revenues by some £7bn a year through a concerted effort to tackle non-compliance.

HMRC’s non-compliance efforts have resulted in different tactics than the broad-brush approach often adopted in the past. One of the most successful has been HMRC’s taskforces, which carry out concentrated compliance campaigns in specific sectors and geographical areas where there is evidence of widespread tax evasion.

Tax taskforces

Since 2011, HMRC has set up more than 140 tax taskforces, looking into sectors and regions as diverse as taxi firms in Yorkshire, fast-food outlets in Scotland and businesses in the South East of England that have failed to submit statutory returns. The taskforces carry out unannounced visits to businesses and work closely with other departments to pool knowledge and expertise.

The campaigns are heavily advertised on the assumption that businesses hearing of a concerted campaign against tax evasion in their sector, or learning of other businesses in the same sector being prosecuted, will be deterred from attempting evasion.

The taskforces have been highly successful in increasing the tax take, recovering more than a cumulative £500m in the first five years of their operation (see table). While, by their nature, the taskforces catch mostly smaller businesses in their net, it is arguable whether this is a conscious decision on the part of HMRC or a by-product of the compliance route it has chosen. HMRC has said that it does not specifically target SMEs and that its sector taskforces look at taxpayers across the scale, from individuals to large businesses.

There is no doubt that HMRC is more organised than before. In 2016 its local compliance unit, which was responsible for managing non-compliance by SMEs, was split into two separate directorates:

  • Wealthy and Mid-Sized Business Compliance
  • Individuals and Small Business Compliance.

Better IT systems and use of data has also helped to improve HMRC’s compliance performance. A card transaction programme, for example, which was introduced in 2013, has allowed HMRC to broaden its investigations to include more non-cash businesses by monitoring payments made to businesses by credit and debit card. HMRC then cross-references this data with its own database to look for discrepancies between revenue collected and revenue disclosed through a tax return.

Businesses must register to take part in the card transaction programme, and last year a disclosure campaign launched by HMRC gave businesses the ‘opportunity to bring their tax affairs up to date’ if they accept card payments.

Grounds for suspicion

A number of recent decisions have done nothing to dampen the suspicion that HMRC has SMEs squarely – and unfairly – in its sights. In January this year, for example, HMRC stopped accepting payments of tax via personal credit card – an important payment option for small businesses, which may struggle to access loans, overdrafts and flexible funding.

There are also concerns that HMRC campaigns can be overzealous. For example, research by Moore Stephens found that 53% of HMRC’s penalties against businesses for late VAT filings or payments were overturned last year – 8,288 of the 15,664 internal review cases held were overturned. Some SMEs have good reasons for paying VAT late, but HMRC, says Moore Stephens, has a ‘guilty until proven innocent’ approach, hence the large number of cases that are subsequently overturned.

Overall, HMRC collected £28.9bn through all its compliance activities in 2016 – 40% more than in 2011. As its compliance methods and access to data and analytics improves, more smaller companies will inevitably be caught in its net. Winding-up orders are still relatively unusual (and a last resort), but HMRC has other weapons in its armoury – from hefty fines to the power to seize business assets. Its compliance methods are more sophisticated than ever, and that means that SMEs have nowhere to hide.

Liz Fisher, journalist

Swipe to view table

Ramping up the tax take

  2011/12 2012/13 2013/14 2014/15 2015/16
Additional yield £24.3m £47m £85m £138.1m £248m