Small business owners should be taking steps to improve their record keeping and seeking specialist advice following new research that has suggested HMRC is targeting SMEs rather than larger businesses over potential tax avoidance because it perceives them to be an easier target.
That’s the message from online accounting software provider Clear Books, commenting on the research from UHY Hacker Young, which reported HMRC collected an additional £474 million in corporate tax as a result of investigations into SMEs during the 2016/2017 tax year, which represented a five per cent year on year increase.
‘Small businesses should be concerned by this report,’ explains 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 may also have substantial cash reserves along with the resources, the skills and the funds to be able to pay for a long drawn out process. And if it involves a significant sum, they know that if they push back hard enough, HMRC will end up negotiating on some sort of settlement deal.’
‘But, if a small business receives a brown envelope from HMRC demanding tax and imposing a penalty, most don’t have that specialist knowledge and may not even be in a position to afford specialist third party services. Their initial reaction may be to get it off the books quickly and just pay it.’
Sayers warns that the risk may be greatest for small business owners attempting to handle their own accounts and that not seeking specialist advice could be a false economy.
‘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. 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. So having some form of accounting software – and it doesn’t have to be cloud accounting software like Clear Books – but some form of mechanism to keep up to date records of your financial affairs is a major step towards avoiding those sorts of issues.’
But even small businesses using accounting software are still advised to seek advice from a specialist.
‘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,’ concludes Sayers.