HMRC Scrutiny on the Rise: What Small Businesses Need to Know

As the government intensifies efforts to tackle tax evasion, small businesses must be aware of the increasing scrutiny from HMRC and take proactive steps to ensure compliance

CREDIT: This is an edited version of an article that originally appeared on SME Today

In November 2024, as part of the government’s efforts to combat tax evasion, 200 new compliance officers began work to ensure that individuals and businesses pay the correct amount of tax on time.

Throughout this year, the government will gradually implement changes to the tax system aimed at reducing the ‘tax gap,’ which Chancellor of the Exchequer Rachel Reeves estimates at approximately £40 billion. As part of these efforts, HMRC plans to recruit 5,000 additional tax officials. A portion of the funding for this initiative will be specifically allocated to focus on high-priority criminal cases, reinforcing a strong deterrent against tax evasion.

For small businesses, being prepared for and understanding potential HMRC scrutiny is crucial to minimise disruptions, ensure smooth operations and reduce stress.

Why you Might be Contacted by HMRC

Several factors can trigger an HMRC compliance check. For instance, investigations may arise due to inconsistencies in tax returns, significant fluctuations in income or expenses, or third-party information. These checks can encompass various taxes, such as corporation tax or national insurance. Typically, HMRC will request to review a range of documents, including tax returns, accounts, PAYE records and more.

What to Expect

At the start of a compliance check, HMRC will issue an information notice outlining the required documents and details. In some cases, officers may visit a premises, sometimes without prior notice, depending on the situation. Based on their findings, HMRC will assess whether any tax is owed and decide if a penalty is warranted.

What You Should Do

Small businesses should seek legal advice immediately and before engaging in any discussions with HMRC. It’s essential to stay fully informed and ensure financial records are in order throughout the process.

Non-compliance with HMRC can result in significant costs and penalties, and it can take two main forms. First, businesses may fail to provide the required information or documentation in response to an HMRC information notice. Second, businesses may deny HMRC access to their premises, hindering an investigation. Both actions can lead to fines and other penalties, highlighting the importance of compliance at every stage of the process.

In conclusion, staying prepared and compliant with HMRC requirements is essential for small businesses to avoid costly penalties and disruptions. By seeking legal advice, keeping financial records in order and understanding the potential triggers for a compliance check, businesses can navigate the process with confidence and minimise the risk of penalties.