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What’s behind HMRC’s increased tax take from SMEs?

31st Aug 2017
Staff writer AccountingWEB
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HMRC collected an extra £3.4bn from SMEs in the tax year to April 2017, in part due to a crackdown on firms making VAT payments – in fact, this accounted for 49% of the extra tax take. Christian Annesley gathers views on the tax authority’s priorities, tactics and resources

With the UK’s recent austerity drive, HMRC has come under more and more pressure from the Treasury to boost its take and improve the country’s finances.

In the latest tax year, to April 2017, the take has improved again, and the analysis shows that much of that leap has come through higher tax collections from small and medium-sized businesses – in particular, via a crackdown on firms that fail to pay VAT, according to tax investigation insurance company PFP.

AccountingWEB wanted to take a closer look at the trend to understand more.

PFP’s analysis

PFP’s managing director, Kevin Igoe, outlined some of the context when he noted how the firm’s research showed the Revenue widening its net, but in particular, distinct ways.

“It’s clear from the high tax take that the Revenue has found investigations into SMEs to be fruitful, and therefore it is likely that this focus on smaller organisations will continue. In order to avoid scrutiny, SMEs must make sure they are filing their returns correctly.”

Igoe added that VAT is one clear avenue by which HMRC can rake in extra revenue and suggest the tax authority is prepared to use all means at its disposal.

“This will include the use of its Connect database and taskforces to identify those it suspects may be underpaying on their tax, as well as more aggressive tactics such as accelerated payment notices and property raids.”

HMRC’s priorities

But not everyone believes there is strong evidence that HMRC’s tactics are excessive.

Tim Walford-Fitzgerald is a partner at the London-based accountancy practice HW Fisher & Co.

“The tax system isn’t perfect and it is a challenge to administer,” he told AccountingWEB. “Looked at in the round, you can make a case that the SME sector is one area where there has been a tax gap, based on the revenues raised against the numbers who are self-employed or directors of microbusinesses.

“In that respect, at least, it’s natural for the Revenue to make it an area of focus for its limited resources – it has to target those areas which are generally compliant but where it has a decent chance of making an improved return. That’s what it has done, you could argue.”

The question then is whether the way HMRC is going about this is reasonable and fair – and there are many sides to the answer.

Walford-Fitzgerald believes one area where SMEs are affected is HMRC’s “more aggressive outsourcing of debt collection” in many contexts.

“The Revenue in recent years has been faster to engage in collection for smaller amounts, and it probably could be proved a good use of its resources.”

But not everything is fair in HMRC’s tactics. Walford-Fitzgerald says the political moves against landlords and the buy-to-let sector, including changes to stamp duty and other changes like the abolition of the wear-and-tear allowance, have had an impact on those running property businesses, with HMRC following up hard.

At the same time, another area where change has landed is in the government’s efforts to manage self-employment and the so-called gig economy better in tax terms. The Institute for Fiscal Studies and others have argued that the tax system has long encouraged people to work for their own business rather than be an employee, and it is an area where change is now coming through.

VAT tactics

But if HMRC is charged with being the administrator of some changing laws, that in itself is a world away from its tactical moves to raised its SME-related take.

If we return to the question of HMRC tactics, one area where there does appear to be some evidence of a tough line in relation to SMEs is around VAT.

Mike Block, VAT principal at HW Fisher, said his VAT-specific experience in relation to SME clients is that HMRC can today be very tough on SMEs with some of its arm’s-length, from-the-desktop queries.

“In some instances, they will look closely at VAT submissions and look for any kind of technical breach and issue a penalty. It’s often not even related to areas that will boost the tax take, but I guess the penalties themselves do boost the take.”

Block said this kind of intervention is increasingly common, and, even if there is a dialogue about the breach and some resolution agreed, often the penalty will stand.

“In the past, the approach taken by HMRC was more of a common-sense one and often based around an in-person VAT inspection. It’s now more aggressive at a distance, and there are fewer visiting officers in the mix, even if those there are generally good. A lot of activity is now done via a desktop inspection that asks for more information.

“It makes for a tough context for SMEs, I think. It used to be hard to get a penalty related to a VAT return, and now it is all too easy.”

Different departments, different data?

Block also pointed towards how the dynamics have shifted, in that different HMRC departments have always had different approaches and different reputations with the accountancy firms engaging with them – and it is a point that is also made by Richard Baldwyn, a director at TFA Accountants in Poole in Dorset.

 “There is a lack of consistency among HMRC departments, it is fair to say, which is difficult when so much consistency is being expected of businesses in return,” said Baldwyn.

“One of the most unhelpful HMRC departments, in my experience, is the one that runs the Construction Industry Scheme. I remember once, quite recently, a dispute arising and there was a client and penalties being issued. To get HMRC to cooperate sufficiently, and accept its accountabilities plus the failures in its data record, was extremely challenging.

“To this day, in fact, we have never had a full and proper response from HMRC related to the issues we raised. In part that’s definitely because HMRC’s back-end systems aren’t always synced and in agreement; it makes conducting debates that much slower and harder.”

Baldwyn added that the inconsistency extends to other areas, too, with some departments badly resourced and with poorly trained staff or creaking systems, while others are relatively good – with online systems that work efficiently and engaged staff.

“You just want that gap between expectation and reality to close up. At times HMRC expects more knowledge from taxpayers – whether individuals or SMEs – that its own staff can boast. That’s not reasonable, and it is not conducive to every SME and every company director being treated fairly,” he said.


Have you found your business or your clients affected by this crackdown? Is it a proportionate means of closing the tax gap found in the SME sector, or an inconsistent and excessive clampdown? Let us know what you think in the comments.

Replies (5)

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By ireallyshouldknowthisbut
31st Aug 2017 09:15

One big factor you have missed is undoubtedly dividends for SME's bought into March 2016 ahead of the higher rates from April 2016.

This hits the payments for January 2017 and July 2017, in particular on the payments on account doubling the effect.

Many of my clients are now having refunds for July 2017 as their 2016/7 tax bills are much lower.

As HMRC 'cash account' what that report as 2017 figures is actually 2015/6 reported incomes.

This was presumably a deliberate ploy by our then chancellor in the expectation of an election next year so he could show strong tax receipts. How things change!

Which reminds me, must do my own tax return.

Thanks (2)
By Agutter Accounts
31st Aug 2017 10:11

“One of the most unhelpful HMRC departments, in my experience, is the one that runs the Construction Industry Scheme."

I'll second that one. I had quite a saga getting a refund for a client recently which took months. And the advice I got from HMRC was inconsistent and unhelpful.

I'm not a big fan of CIS. The system is abused, and it can be poorly administered at the HMRC end as the above illustrates.

Thanks (1)
Replying to Agutter Accounts:
By johnjenkins
31st Aug 2017 10:31

A couple of our Ltd co. CIS clients have been waiting 4 years for their refunds. I must admit the SE refunds come through PDQ. It's only when there is an internal investigation that there is a delay. Customs and excise, I find helpful and understanding. PAYE investigations are the worst as they try to go outside of their limits.

Thanks (1)
By roseorgan.fsbdial
31st Aug 2017 15:32

4 years! I thought the 10 months my client experienced was appalling!

Thanks (0)
By AndrewV12
01st Sep 2017 10:32

“In some instances, they will look closely at VAT submissions and look for any kind of technical breach and issue a penalty. It’s often not even related to areas that will boost the tax take, but I guess the penalties themselves do boost the take.”

Collecting the right amount of VAT is fine, technical breaches are not.

Thanks (0)