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Recently released figures reveal that HMRC collected £4.9 billion in extra tax from investigations into small businesses and individuals throughout the 2018-19 tax period. This figure included £1.2 billion in underpaid income tax.

The data also shows that HMRC spent a huge £309 million on paying staff to conduct these investigations. While that seems like a lot, it’s a yield of £16 in retrieved tax for every £1 spent on staff.

The majority of the investigations were conducted on individuals, sole traders and small businesses with fewer than 20 employees and an annual turnover below £10 million.

Why is HMRC targeting small businesses?

While the past few years have seen calls for more investigations into large corporations, it seems that it’s the smaller businesses which get the most attention.

According to the law firm which revealed this data, Pinsent Masons, HMRC is dedicated to focusing on large companies. The high level of returns it gets from investigations on smaller businesses is hard to ignore, though. In fact, they may even start to dedicate more staff and resources to smaller businesses in the future.

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It doesn’t seem unreasonable considering that there are a greater number of smaller businesses than there are large companies out there. Unfortunately for smaller businesses, they also tend to have fewer resources to spend on the advisers and lawyers who can deal with HMRC on their behalf.

Are small businesses just making mistakes?

When the subject of unpaid or underpaid tax crops up, most people assume that this is a deliberate thing and that people are purposely avoiding tax. It might even be true in some cases, but the complexity of dealing with tax returns means that a lot of people are simply making mistakes on theirs.

A combination of an inefficient bookkeeping system, an inexperienced person filing tax returns, or lost invoices and receipts can result in businesses submitting false information unwittingly.

All it takes is a single mistake on a Self Assessment tax return, and HMRC can launch an investigation into previous years too, increasing the chances of other mistakes being found.

What can small businesses do to ensure compliance?

While tax return mistakes are easy to make, there are steps that businesses can take to ensure they’re doing everything above board.

About The Author

Kara Copple

An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.

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