HMRC’s £3.5bn crack down on SME VAT underpayment

HMRC has raised an additional £3.5bn in the last year through inquiries into the under-payment of VAT by small businesses, according to research by tax investigation insurance company PfP which suggests this sector is coming under increasing scrutiny

Additional VAT revenue accounted for almost half (45%) of the additional tax take in 2014/15 from investigations by HMRC’s local compliance teams, which are responsible for small and medium-sized businesses. The total sum raised through tax investigations by local compliance teams last year was £7.7bn.

PfP says the figures, which it acquired through a Freedom of Information request, show that VAT is a key area of focus for HMRC as it looks to maximise tax revenue. The frim argues that pressure on SMEs is also likely to increase as HMRC announces the closure of 170 of its regional offices, in favour of employing specialist taskforces to carry out tax-related investigations.

Kevin Igoe, managing director of PfP, said: ‘VAT investigations represent a rich seam for HMRC and the area is coming under increasing focus as a result. A “hardcore” of tax-evading small businesses are making life difficult for the vast majority of compliant SMEs, and leaving them facing investigations over genuine oversights and errors.’

Igoe cautioned that SMEs need to be particularly wary of potential pitfalls when submitting information to HMRC and ensure they are on top of their accounts at all times.

In addition to the employment of taskforces, HMRC has also invested £80m in the optimisation of Connect, computer software that has been developed to access and trawl databases of personal and commercial financial information.

Connect is able to cross-reference its findings with the information submitted to HMRC by an individual or business. As of September 2016, its powers will be extended further still as it is granted access to files held by banks and other financial institutions based in British overseas territories.

Igoe said: ‘The Connect database and the employment of the highly efficient taskforces are forming a pincer movement on those who either intentionally, or more likely unintentionally, report incorrectly on their VAT returns.’

HMRC has also increased its focus on VAT compliance for large business in recent years. The large business directorate brought in about £3.4bn in extra VAT last year, more than double the amount collected by the former large business service in 2013-14.

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