Small business owners have been warned that they need to be even more careful with record-keeping as HMRC targets SMEs over tax avoidance.
Online accounting software provider Clear Books is advising small business owners to improve their record-keeping and seek specialist advice following new research that suggests HMRC is "targeting SMEs rather than larger businesses over potential tax avoidance because it perceives them to be an easier target".
Research by UHY Hacker Young has found that HMRC collected an additional £474m in corporate tax as a result of investigations into SMEs during the 2016/2017 tax year, a 5% year-on-year increase.
"Small businesses should be concerned by this report," said Phil Sayers, sales and marketing director at Clear Books. "If HMRC thinks that small businesses have deliberately or even accidentally understated their earnings and therefore their tax liabilities, then the penalties can be really quite prohibitive. HMRC can backtrack several years into their financial affairs, which can be both hugely time-consuming and the penalties that could be imposed could be quite onerous. So for an SME that gets it wrong, even accidentally, it can cost them a lot of money."
Sayers says that the approach HMRC adopts with small businesses can be completely different to the approach it uses with larger organisations.
"Larger organisations quite often have in-house tax and legal specialists who are coming up with plans to minimise the tax liability … They know that if they push back hard enough, HMRC will end up negotiating on some sort of settlement deal."
Small businesses are more likely to make mistakes or miss out on opportunities to reduce their tax burden. "If you are the type of business that collects its receipts in a shoebox, for example, there is every possibility you are going to lose receipts along the way that then can't be included in your accounts, thereby increasing the stated profit you have made," said Sayers. "Moreover, if you are trying to do your own accounts you may not know about the things you can quite legitimately claim as business expenses and therefore use to reduce your profits and your tax liability."
According to Sayers, every small business, even those using accounting software, should seek specialist advice. "Accounting software will, if you want, enable you to pretty much completely run your own accounts. But we still recommend you get specialist advice to make sure you are doing things the right way and to check whether there might even be other ways in which you could operate that would reduce your tax liability and reduce the likelihood of you being faced with an investigation."