- Small businesses now account for 60% of overall tax gap
- Focus on offshore tax compliance unlikely to generate meaningful revenues
HM Revenue & Customs (HMRC) will likely target small businesses and their owners as part of a Labour government’s drive to close the tax gap, according to data obtained by Price Bailey, the Top 30 firm of accountants.
According to a report just published by HMRC into the tax gap, “The share of the tax gap attributed to small businesses has increased over the last 5 years, from 44% of the overall tax gap in 2018 to 2019 to 60% in 2022 to 2023.”
The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.
The Labour Party identified offshore tax compliance as the focus for a drive to reduce the tax gap, which is currently estimated at £39.8 billion, in a document headed “Labour’s plan to reduce the tax gap.”
Price Bailey points out, however, that HMRC has failed to publish an estimate of the offshore tax gap alongside its 2023/24 tax gap report despite promising to do so in response to a Freedom of Information Act request received on 21 December 2023.
Price Bailey says that the tax gap for wealthy individuals in self-assessment, many of whom are likely to have assets offshore, is estimated to be just £1.6 billion compared to £24.1 billion owed by small businesses.
Andrew Park, Tax Investigations Partner at Price Bailey, comments: “We have been seeing increased HMRC scrutiny of small businesses and directors in recent years. That is likely to intensify as part of a post-Election drive to close the tax gap. It’s hard to see how HMRC can make serious inroads into reducing the tax gap without hitting small businesses hard.”
“The notion that HMRC can collect meaningful amounts of additional tax by targeting individuals with offshore assets is fanciful. There was a sustained focus on taxpayers with offshore assets and a disclosure amnesty in the years after the global financial crisis during which most of the low hanging fruit was picked.”
He adds: “There are 5.3 million small businesses in the UK, which means a concerted campaign to close the tax gap is going to see HMRC cast its net very wide indeed.”
Small business tax gap
According to HMRC, 45% of small businesses filed incorrect Corporation Tax returns, up from just 17% in 2017/18, and the highest proportion in at least 16 years.
Price Bailey says that a growing proportion of enquiries into the tax affairs of small businesses are looking at several years at once. HMRC increasingly opens parallel enquiries into directors, so it can look at the tax position from both ends.
Andrew Park says: “Business expenses account for a large portion of the small business tax gap. I have seen owner-managers claiming tax relief for expensive suits, leisure travel, family birthday parties and in one case even a hovercraft. They can be very optimistic about what qualifies as a bona fide business expense.”
“It might be politically expedient to target a small number of wealthy individuals with assets offshore, but HMRC clearly doesn’t see much opportunity to do so. To make a serious dent in the tax gap HMRC will need to go after a vast swathe of the public on ordinary incomes.”
Price Bailey says that small business owners concerned about the growing risk of an investigation by HMRC should consider obtaining fee protection insurance, which covers the cost of professional fees. The Price Bailey Tax Investigation Service (TIS) is designed to reimburse professional costs in the event of Self-Assessment Full and Aspect Enquiries for both corporate and non-corporate clients, including enquiries into the personal affairs of directors and partners.
