Tax Compliance - Mind The Gap!

Posted: Nov 1, 2017

Many of our clients will remark that they have not had a VAT or PAYE visit, or a HMRC corporation tax enquiry “for ages.” It’s easy to become complacent in that situation and assume that you are not on the taxman’s radar. However, anyone with a small or medium sized business should be under no illusions that HMRC do in fact have you in their sights.

Each year HMRC publish their estimate of the “tax gap” – the difference between what they actually collect and what they believe they should collect. HMRC have just published their figures for the 2015-16 year where they estimate the gap to be £34 billion. Of that, they believe just less than 50% relates to SMEs, with the vast bulk of that coming from VAT & PAYE.

It doesn’t take a great leap of logic to realise that, to close the gap, HMRC are likely to focus on the SME sector. In fact, we are already seeing a step up in the number and scale of HMRC enquiries. Examples include:

  • A full books and records review into a small business operating in an almost entirely non-cash environment
  • A three hour grilling by three PAYE Inspectors of the owner and finance manager of a small (and very tightly run) company
  • Highly detailed enquiries into the vendors of a successful business, focusing not just on the sale itself but on all aspects of their tax affairs.
  • Highly detailed enquiries into prepaid expenses and deferred income in the UK subsidiary of a foreign parent.

Once HMRC has the bit between their teeth, they are very difficult to shake off – they are after results (although the urban myth they are paid by results is just that – a myth).

The need to take care when responding to HMRC enquiries cannot be overstated. The new breed of tax officials are not like the pragmatic Inspectors when I was on the other side of the fence.

Just one ill thought through answer can be enough to convince them you have something to hide – and it is amazing what people say when they have been grilled on all kinds of issues for three hours!

Dealing with HMRC enquiries is both an art and a science – when done properly it can lead to a relatively swift and painless conclusion. When done badly however it can lead to many months and years of heartache and angst as the taxman looks into every aspect of your tax affairs.

The best course of action to take is to seek professional advice, no matter how seemingly innocent the initial enquiry might seem. Perhaps you might think “well he would say that, wouldn’t he…” but to my mind any business owner who tries to deal with a HMRC enquiry on their own these days is a very brave soul indeed!

for more information on how best to deal with a HMRC enquiry, feel free to contact a member of our tax team on 0161 477 2474 or email