By Daniel Hunter

The extra tax yield from compliance investigations into small and medium sized businesses by HM Revenue & Customs jumped 39% in the last year, says national accountancy group UHY Hacker Young.

Investigations into small and medium sized enterprises (SMEs) netted HMRC £434 million in extra tax and fines in 2011-12, a sharp increase from £311 million in 2010-11 (year end March 31). These figures are on top of taxes already paid by these businesses.

“HMRC has been set a challenging tax yield target by the Chancellor, and small businesses have found that they are an easy target for HMRC’s crackdown,” Roy Maugham, Tax Partner at UHY Hacker Young, said.

“Small businesses are more likely to make innocent errors in their tax calculations than larger businesses, meaning the small business community offers plenty of opportunity for HMRC.

“Many businesses are still struggling during the recession so having to pay extra taxes, fines and interest is the last thing they need.

“The other hidden cost to businesses is the amount of time it takes to deal with a tax investigation. An SME is also going to find it hard to afford a full time accountant to deal with or challenge a tax investigation so is more likely to concede, unnecessarily, to demands for extra tax.

“Add this to HMRC’s tactic of sending multiple demands for additional payment for different taxes simultaneously to the same business, and small businesses can very quickly find themselves overwhelmed by the compliance burden.”

UHY Hacker Young says that HMRC has been targeting tax areas that have previously been relatively overlooked, in an attempt to increase tax revenue.

“Areas like PAYE and VAT have always been scrutinised to an extent, but HMRC is now looking more closely at issues like corporate entertainment and employee benefits — such as company cars, private healthcare, or company-subsidised fuel costs — which had previously escaped serious scrutiny,” Roy Maugham explains.

“HMRC’s take on employee benefits in increasingly draconian, for example. They’re looking for any minor compliance slip by a business: whether it has reported the right thing at the right time, or challenging whether company cars are genuinely being used for company business at any given time.

“Small businesses need to be aware of this when completing their tax returns. The days of HMRC having a relaxed approach to assessing deductions are long gone.”

UHY Hacker Young adds that HMRC is also challenging the tax returns of new types of businesses, as it seeks to find as much revenue as possible.

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