One of the inevitable side effects of the slowing economy is that the Government finds it harder to raise the tax revenue that it needs.

So, in a shrinking economy it could be that HMRC is going to be more aggressive in pursuing the money that it thinks taxpayers owe it.

HMRC does seem to be working much harder on tax investigations into small businesses and individuals. Data from HMRC shows that it raised 54 per cent more from tax investigations into individuals and small businesses in the last year.

That’s a pretty astonishing £5.8 billion in extra tax in 2021/22, up from £3.7 billion raised in 2020/21.

Over half of that is from investigations into ordinary individuals. Tax investigations into the super wealthy are not included in this.

A rough calculation shows how profitable tax investigations can be for HMRC. For every pound spent on investigations into individuals and small businesses, HMRC gets £6.60 back in additional tax.

The fact that HMRC believes that it is owed £42 billion in underdeclared tax – also shows there is clearly scope for even more tax investigations.

What are the areas that HMRC is focusing on in terms of investigations into small businesses and individuals?

For individuals, investigations continue to focus on underdeclared earnings, an increase in investigations into underpaid Inheritance Tax, undeclared income from buy-to-let and holiday lets and even an increase in investigations into undeclared income from social media influencers!

One area that HMRC is focusing on within small business investigations is incorrect claims for R&D tax credits.

R&D tax credits are worth billions every year and HMRC has become increasingly concerned that SMEs that aren’t using registered accountancy firms, have been encouraged to submit incorrect or false R&D claims. A study by HMRC found that SME R&D errors and fraud accounted for 7.3 per cent of all claims from SMEs.

HMRC has responded to that by putting in place a risk assessment process for all SME R&D tax credit claims.

We expect that process to lead to more investigations and unfortunately may mean more innocent small businesses getting caught in HMRC’s net and facing costly tax investigations.

These investigations can be very expensive, stressful and time-consuming for those involved. The best way to avoid one is to ensure that tax returns are completed well in advance of the deadline.

Obtaining professional advice would make it easier to challenge any HMRC investigation and would greatly assist the individual in communications with HMRC.

Seeking professional advice could also help to assess exactly how much tax, if any, is still owed to the tax authority.

Any individual or business that is unclear if they have paid the right amount of tax must get their tax affairs in order immediately. The longer any individual or business owing tax leaves it before contacting HMRC, the more they will likely have to pay in penalties.

We offer a Tax Investigation Service to protect individuals and businesses. To find out more, get in touch here or through your usual Milsted Langdon contact.