One of Cumbria’s leading accountancy firms fears that SMEs may soon be a prime target for HMRC after the latest data shows that they are the biggest contributor to the UK’s tax gap.
Last month, new Chancellor, Rachel Reeve, stood before Parliament to declare that the UK faces a £22 billion black hole in its public finances.
With a promise not to increase taxes on working people, such as Income Tax and National Insurance, many fear that businesses pose an obvious target.
In the days that followed the Chancellor’s speech, several announcements were made, which not only showed the size of the tax gap that SMEs contribute towards but also new resources granted to the tax authority to close it.
According to HMRC’s annual report, despite revenues being up by 3.6 per cent to £843.4 billion, the tax gap is growing.
In the last tax year, this amount between taxes collected by HMRC and the theoretical liability that should be collected increased by almost £40 billion.
The biggest contributor to this deficit was small business, which accounted for 60 per cent of the current gap – £23.8 billion.
Graham Lamont, CEO of Lamont Pridmore, said: “Sole traders and small businesses have been some of the biggest contributors to the tax gap for some time, often due to their failure to remain compliant.
“While HMRC has tried to tackle this issue in the past, with new rules and penalties they have often struggled to close the gap effectively, but this might be about to change.”
The Treasury will fund HMRC to hire 5,000 more staff and invest in IT infrastructure to combat tax evasion.
During the election campaign, Labour promised to recover £6 billion in unpaid taxes over five years and pledged £555 million for HMRC, a 12% increase on the planned 2024/25 budget of £4.7 billion, as part of its tax evasion crackdown detailed in Labour’s Plan to Close the Tax Gap.
“Businesses cannot rest on their laurels when it comes to tax compliance and planning as HMRC ramps up its ability to find those that aren’t paying their fair share,” said Graham.
“In some cases, businesses may not even be aware that they aren’t meeting their liabilities until they find themselves subject to a sudden tax enquiry.”
Lamont Pridmore believes that more and more schemes are at risk of being targeted by HMRC, pointing out that the tax authority has just identified a further £4.1 billion of lost tax revenue to error and fraud in the R&D tax relief scheme.
Due to the risk and costs involved in an HMRC enquiry, Lamont Pridmore is encouraging more businesses to take out fee protection insurance, which helps to cover the cost of an expensive tax investigation and any subsequent tribunal.
