One thing we do know is the plan to raise £5bn through a clampdown on tax compliance—closing the “Tax Gap,” which all the parties hoped would magically fill a bit of the fiscal hole.
HMRC estimates the “tax gap”—the difference between the amount of tax that should be paid and what is actually collected—at £39.8 billion. Notably, HMRC estimates that small businesses now account for 60% of the tax gap, up from 37% in 2017-18. The gap arises from a combination of tax evasion, tax avoidance, and simple human error.
In theory, the plan is to bolster HMRC’s capabilities. The government plans to invest significantly in modernising the agency’s technology and using advanced data analytics tools and artificial intelligence to help spot errors and non-compliance. In reality, the plan includes recruiting 5,000 new Tax Inspectors and casting a wide net.
The recent clampdown on R&D tax credits gave us a taste of what this could mean for small businesses. Inexperienced staff, poor processes, lack of communication, and opaque appeal processes meant many legitimate claims got caught in the net. All tax investigations, with or without merit, require time-consuming and costly responses.
We can guess at some of the issues that might flag businesses up for investigation—businesses suspiciously just below the VAT threshold, businesses suspected of being part of the informal cash economy, incongruities in payroll costs, complex entity structures, offshore transfers, intercompany balances, consistently low taxable profits, etc.
There will likely be a period of amnesty for genuine errors. Businesses should pay closer attention to their tax calculations next year to ensure that any errors in how tax is calculated are rectified. Reviewing your financial affairs, getting good tax advice, potentially restructuring your business, and reviewing accounting treatments will be more important than ever.
The significant risk to our clients is getting caught up in a Tax Investigation, even if it is groundless. HMRC estimates that SMEs are responsible for 60% of the tax gap, giving us genuine cause for concern that small businesses may be randomly targeted.
At Bevan Buckland, we offer an insurance-backed service to protect you against the potential costs of a tax investigation. To learn more, please refer to the ‘One thing you should do this month’ section of our client newsletter or contact your usual Bevan Buckland contact.
*This article has been written by our Chief Executive and does not necessarily represent the views of the firm.
