While the recent crackdown by HM Revenue & Customs (HMRC) on unpaid VAT has recovered less money than it did last year, the amount recovered from individuals and small businesses rose by 4.3 per cent to £1.9 billion.

Research by Thomson Reuters found that despite a surge in investigations into unpaid Value Added Tax (VAT) in the 2024-25 tax year, only £10.8 billion was uncovered.

VAT is one of the Treasury’s top three sources of revenue, and it has clawed back £10.8 billion through investigations this year. However, even though the number of probes into medium-sized firms rose by 33 per cent and by 2.9 per cent into large companies, the amount raised from them fell from £2.3 billion to £1.8 billion and from £5.8 billion to £5.3 billion respectively.

In fact, the only increase in the amount of unpaid VAT recovered came from individuals and small businesses, where the amount rose by 4.3 per cent year-on-year from £1.8 billion to £1.9 billion following a commensurate 4.3 per cent rise in the number of investigations.

As a spokesman for Thomson Reuters said, given the need for the Government to fill the estimated ‘black hole’ in public finances of up to £50 billion, increased crackdowns could lead to some innocent businesses being hit by investigations, as “HMRC may be inclined to see a simple error as potential evidence of tax avoidance or evasion.”

Commenting on the research, James Hardy, Forensic Director at Milsted Langdon, said that small firms should prepare themselves for the taxman’s scrutiny as the crackdown continues.

“Even when a business knows it has done nothing wrong, being investigated can be stressful and take up a lot of time they do not have to spare. It often distracts owners from running the business and can damage both productivity and confidence.”

He adds, “In the pursuit of fiscal integrity, HMRC’s intensified scrutiny of VAT has revealed a telling shift: while large corporations yielded less, individuals and small businesses, which make up most of the 2.7 million VAT registrations, bore the brunt of recovery efforts. 

“This means we’re seeing HMRC taking a far more data-led approach to identifying potential underpayments, and that context is potentially being lost when investigations are triggered.

“In many cases, what HMRC views as suspicious is actually just a bookkeeping error or a misunderstanding. Having an accountant who understands how HMRC operates can make all the difference in resolving matters quickly and help keep the fallout for the business as light as possible.”

Sources: This is Money