SMEs face double whammy in tax avoidance clampdown

The government’s announcement of a crackdown on tax avoidance will see the
UK’s 4.8m-strong small businesses forced to use vital funds to bankroll
expensive tax disputes with HM Revenue & Customs, advisers fear.

Some have already seen SMEs throw in the towel and pay the taxman, even when
they believe there is no case to answer, to avoid the financial pressure of an
investigation. The government has stated its intention to foil tax avoidance,
refusing to exclude any sector from greater scrutiny.

Mike Down, tax investigations partner at Baker Tilly, said in some cases the
sums being contested were so small in relation to the money needed to fight a
drawn-out dispute that companies were cutting their losses and paying up.

“We’re seeing cases where companies say, ‘We don’t agree with the amount of
tax the revenue is asking for, but it’s not worth the aggro and cost of an
investigation’.” In addition to the pressure being exerted by the new
government, HMRC is also having to do its day job with a smaller workforce.
Advisers fear this will lead to more investigations.

Frank Strachan, senior manager in Grant Thornton’s tax investigation
division, called it a double whammy for SMEs, because they have to tack on the
time lost in directors being pulled away from work, in addition to the cost of
fighting the investigation itself. “These things take time out of SME directors’
schedules,” Strachan said.

He added that SMEs’ relationships with banks, which are still reluctant to
lend, were put under further strain when companies approached them for cash to
fight investigations.

HMRC has a massive workload to handle. It has responsibility for making sure
that the right amount of tax is paid in a range of areas, all of which SMEs are
heavily involved.

Almost all of the revenue HMRC collects comes through businesses – either
directly or from their employees. There are the usual suspects of income tax,
corporation tax, VAT, and national insurance contributions.

But HMRC also looks after excise duties on alcohol, tobacco, fuels and
gambling duties. This is in addition to collecting insurance premium taxes,
capital gains tax, petroleum revenue tax and stamp duty on property transactions
and shares.

In 2008-2009, corporation tax enquiries brought in £792m, self-assessment
business in­quiries £359m, while VAT interventions brought in £2.4bn. This was
classified under local compliance figures, which cover SMEs and some larger
firms as well.

But the recent downturn in the economy has led to a significant increase in
VAT debts, as insolvencies rise and businesses experience cash flow pressures,
which makes it a particular target for HMRC.

£1.7bn of the £2.8bn increase in the VAT tax gap between 2007-08 and 2008-09
can be attributed to this increased debt, HMRC said in its 2009 Autumn report.

HMRC has said that putting customers at the heart of its services formed the
basis of the new HMRC Charter, which sets out what customers can expect and what
is required from them.

“Collecting the right amount of tax is central to this expectation and is
vital to ensuring that public services can continue running efficiently. Our
commitment to reducing the tax gap is unwavering.”

But HMRC has admitted it operates in an uncomfortable situation as its staff
numbers are cut. “There are more tough choices to be made given the tighter
resource position,” Leslie Strathie, HMRC’s chief executive, warned.

The investigations side is an obvious way to ensure the UK’s coffers are
topped up. Last week, Roy Maugham, tax partner, of UHY Hacker Young, said the
government was under clear pressure to reduce the UK budget deficit, warning
that the expectation is that they will try and collect more money from tax

“If that is the case these figures suggest that HMRC should avoid focusing on
SMEs,” Maugham said. “Not only are the amounts of money to gain from
investigating SMEs far smaller but also small businesses feel the pain of tax
investigations much more acutely than multinationals.”

Many smaller businesses won’t have an internal finance function to help deal
with a tax investigation, he warned. Senior managers may have to sit in meetings
with HMRC and they will probably have to pay for external tax advice, Maugham

“If we are set for a period of more frequent and more aggressive tax
investigations we hope that HMRC shows some sympathy for SMEs,” Maugham added.
HMRC has refused to be drawn on its future operations, but did say that the
emergency Budget on 22 June would provide some more detail. “HMRC cannot comment
on speculation.

The upcoming Budget will no doubt provide any future guidance/direction for
HMRC’s work. HMRC is committed to ensure that all businesses pay the right tax
at the right time. Our inquiry work is targeted to risk.”

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