HMRC nets record £3.9bn from extra SME compliance investigations

HM Revenue and Customs (HMRC) has recouped a record £3.9bn in additional VAT from compliance investigations into small and medium-sized enterprises (SMEs) in the last year; a 10 per cent increase on the previous year.

That’s according to analysis from UHY Hacker Young which says many small firms now feel they are directly in the firing line over tax avoidance.

The firm’s review measured the amount of extra VAT taken from investigations into SMEs by HMRC’s local offices and found that this figure has almost doubled in the last three years alone - soaring from £2.2bn in the 2010/11 tax year to £3.9bn in the 2013/14 tax year.

Simon Newark, partner at UHY Hacker Young, said: “HMRC has taken an increasingly hard line over the last year in its attempts to increase tax receipts, so more and more small businesses in particular are finding themselves facing investigation over VAT arrangements that have long been accepted by the tax authority.”

UHY Hacker Young cited recent examples of HMRC’s propensity to move the goalposts, including their decision to apply VAT to online sales of glasses by retailer, Glasses Direct, as they were not accompanied by ‘medical dispensing services’, unlike sales in a high street store.

“Unfortunately, the law is heavily weighted in HMRC’s favour,” added Newark.

“Once they make a decision it is irrelevant if the decision is right, wrong or even unlawful.

“Unless the taxpayer challenges it, the decision will be enforced by the full might of the state with bailiffs if necessary.”

Newark believes SMEs are often put off challenging demands for additional VAT in the courts due to legal costs, with many taking the decision to simply write a cheque to HMRC and end the issue – even if they insist the demands are invalid.

“The belief voiced by many businesses facing these challenges is that HMRC has gone through all the obvious, high-value tax avoidance targets and often met with resistance or the likelihood of expensive court cases being drawn out for years,” said Newark.

“They are worried that HMRC is hoping to achieve some easy results by targeting smaller businesses using novel arguments against VAT treatments that have been accepted for years.”

Date published 9 Dec 2014 | Last updated 9 Dec 2014