HMRC probes grab £3.9bn extra VAT from SMEs

HMRC amassed a record £3.9bn in extra VAT from compliance investigations into small businesses in the last year, a 10% hike on the previous 12 months, according to UHY Hacker Young.

The level of additional VAT from probes into small businesses by HMRC’s local offices has now almost doubled in three years, rocketing from £2.2bn in the 2010/11 tax year.

The top 20 firm says the taxman has become increasingly aggressive in challenging the VAT arrangements of small businesses as it aims to boost its tax receipts.

It claims organisations as diverse as financial advisers, property development companies and sports clubs have all been targeted by HMRC, either to challenge long-accepted VAT arrangements, or to impose what some businesses see as unrealistic burdens on them to reclaim VAT.

UHY Hacker Young says that even though too many SMEs are unable afford a potentially drawn-out challenge to HMRC’s demands for extra VAT, the tax authority has had mixed results when forced to argue its case in court.

In July 2014, HMRC failed in its bid to slash the amount of VAT reclaimed by self-storage businesses, after Lok’n Store, successfully argued in court that it should be able to reclaim 99.9% of the VAT it pays – the percentage of its floor space that used for storage.

But HMRC in October announced its intention to ignore this ruling not just when VAT is reclaimed by other self-storage businesses, but also in VAT cases in general, a move that has been criticised by the tax profession.

In another case, HMRC last year argued that online sales of spectacles by Glasses Direct were not accompanied by ‘medical dispensing services’, unlike sales in a bricks-and-mortar shop, making Glasses Direct liable to pay VAT on the full value of the goods without any exemptions. The first-tier tax tribunal disagreed.

Simon Newark, a partner at UHY Hacker Young, said: “HMRC has taken an increasingly hard line over the last year in its attempts to increase tax receipts, so more and more small businesses in particular are finding themselves facing investigation over VAT arrangements that have long been accepted by the tax authority.”

“Unfortunately, the law is heavily weighted in HMRC’s favour. Once they make a decision it is irrelevant if the decision is right, wrong or even unlawful. Unless the taxpayer challenges it, the decision will be enforced by the full might of the State with bailiffs if necessary.”

“The cost of challenging demands for extra VAT through the courts can be prohibitive for a lot of small businesses, and many will simply decide it’s simpler and more cost-effective to just write a cheque to HMRC, even if they believe the demands are incorrect.”

The firm said some SMEs feared they were being treated as ‘second-class citizens’ in VAT disputes, because the tax affairs of large businesses are handled by HMRC’s specialist customer relationship managers, while SME’s “run the gauntlet of HMRC’s local offices and the much-maligned National Advice Service helpline and Written Enquiries office”.