The Treasury select committee has been told a tenth of the nation’s small business community are facing tax enquiries from HM Revenue and Customs (HMRC).
Over half-a-million small businesses and sole traders are to be investigated by the tax authority, as HMRC seeks to reclaim some of the £34bn tax gap from the 2015-16 financial year. HMRC believes almost half (46%) of this gap is made up of unpaid tax from small firms.
The decision to interrogate tens of thousands of small business accounts has been criticised by MPs. MP Stewart Hosie claims HMRC has made it more difficult for firms to submit correct tax returns by closing local tax offices that historically have provided guidance and support for entrepreneurs in their time of need.
“Wouldn’t it be so much easier if they [small businesses] could go to the local tax office with their accounts and have them checked before submitting,” said Hosie.
Mr Hosie also questioned whether chasing small business owners “because they are missing an invoice for some flooring of the front shop” is a “good use of time and resources”.
David Richardson, Interim Director General for Customer Strategy and Tax Design, HMRC, insists that while “many small businesses pay the correct amount of tax” there is a “competitive” need to “tackle those businesses that aren’t complying”.
Mr Richardson claims that much of the unpaid tax from small businesses is “not through deliberate evasion or avoidance, it is through failing to take reasonable care or through error”.
Mike Cherry, National Chairman, Federation of Small Businesses (FSB), argues that although small firms “have a duty to comply fully with their tax obligations”, HMRC also “has a duty to make that process as clear and straightforward as possible”.
“Unfortunately, the system is very complicated and the average small business loses three working days a year to tax compliance,” added Cherry.
On average, a comprehensive HMRC tax investigation lasts around 16 months, causing disruption and lost time and money for hard-working entrepreneurs.
Even if your business is successful in defending itself against a tax investigation, you will not be able to recover any costs or losses incurred during the investigation from HMRC.
To protect your business, TaxAssist Accountants offers Fee Protection Insurance, covering the cost of work your local TaxAssist Accountant carries out on your behalf during an investigation.
Of course, the best route to avoid an HMRC enquiry into your tax affairs would be to employ your local TaxAssist Accountant to ensure each tax return is accurate and compliant with the UK tax regime.