As we all know, one of the main reasons HMRC want to introduce the new Making Tax Digital (MTD) system is to recoup what it believes is an £8bn shortfall to the public purse. While MTD seems, at the moment, no closer, quietly, HMRC have collected £3.4bn extra in VAT from SMEs in the last financial year.
How has this come about and what does this mean for you as an SME owner?
The taxman is watching
According to tax investigation insurance company PFP, 49% of the additional revenue collected as a result of HMRC investigations came from VAT, up from 45% the year before. In financial year 2016/2017, this additional VAT amounted to £3.4bn.
The company told the Daily Mail This Is Money online newspaper that “the long-term trend of high tax take from SMEs is likely to continue, as a small number of businesses look to avoid tax – putting those who make small mistakes on their tax returns under the Revenue’s scrutiny.”
Earlier this year, PFP told Accountancy Age that HMRC had created two new teams to carry out tax investigations:
• the Individuals and Small Business Compliance Unit, and
• the Wealthy and Mid-Sized Business Compliance Unit.
Kevin Igoe, managing partner of PfP told Accountancy Age that “VAT investigations into SMEs have proven incredibly rewarding for HMRC. The figure will be driven by a combination of carelessness, genuine error or misunderstanding, as well as deliberate and calculated underpayment.”
How do HMRC know who to target?
HMRC launched the Connect social network analysis software data mining computer system in April 2010.
It’s there to search for income disparities often caused by undeclared income. For example, if someone has bought an expensive home but the income they have declared seem to suggest that the house is unaffordable, this will flag up on the Connect system.
According to Wikipedia, Connect cross-references information from many governmental and non-governmental databases, including:
• Adverts on the internet (for example, Rightmove and Zoopla)
• Bank accounts and pensions
• Council tax
• Credit and debit card transactions, going back four years
• Companies House
• DWP (former Benefits Agency)
• eBay and other internet marketplaces
• The electoral roll
• Gas Safe Register
• Insurance companies
• Land Registry – for capital gains tax
Continuing, Mr Igoe from PfP, told the Business Advice website that “VAT can rake in a lot of extra revenue for HMRC, and therefore the taxman is prepared to use all means at its disposal”.
Being investigated for tax by HMRC takes a long time, is scary (HMRC is the only part of government where you are guilty until you prove yourself innocent), and costly. According to the Federation of Small Businesses, “on average, full HMRC investigations last 16 months and costs a potential £5,000 in accountancy fees”.
If there is anything that is concerning you about your personal or commercial tax affairs, it is imperative that you try to remedy them. A good rule of thumb for dealing with HMRC is that they’re much more flexible and lenient if you tell them rather than they found out for themselves.
To talk in confidence, call your Modina team on 020 7183 8241 and ask how we can help.