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Meg Hillier Chair of the PAC replacing Margaret Hodges

Meg Hillier Chair of the PAC replacing Margaret Hodges

In my recent Blog “HMRC is unfair to small businesses say PAC”, I reported how Public Accounts Committee chair Margaret Hodge and committee member MP Richard Bacon, verbally savaged HMRC’s Dave Hartnett and Edward Troup over mounting evidence that they were disproportionately targeting SME’s and in particular, smaller owner managed businesses.

HMRC will never openly admit it, but it is blindingly obvious that small businesses are treated differently from other taxpayers. This may be because they are a different kind of thing or rather, several kinds of thing; but the defining characteristic is that small businesses generally only have Accounts prepared to satisfy the taxman (and perhaps the bank). If this requirement wasn’t there, most would otherwise manage without the hassle and expense of having them prepared, but they need them as they have to submit Tax Returns based on those Accounts.

Until the introduction of Self-Assessment, small businesses were required to submit the actual Annual Accounts as well as a Tax Return and all of those Accounts were given at least a very brief scrutiny. They were then classified by HMRC as E, R or A with E meaning enquiry (‘Enquiry’ having replaced ‘investigation’), R a question on a single aspect and A accepted and passed straight through.

Larger businesses (but still SMEs) were most unlikely to get a full enquiry but more likely to have specific questions. In those days it was thought by HMRC that an audit certificate was some sort of badge of authenticity. These days HMRC has learned that for the purposes of deciding whether the tax figures are right, audit certificates are a waste of time and in any case nobody in the SME field has audits any more.

In the days before SA, when I worked for HMRC, it was abundantly clear to me that the vast majority of inspectors firmly believed that all small businesses were on the fiddle (which was a major reason for my decision to resign and join the ranks of the poachers). Then, the main thrust of any investigation wasn’t to decide whether or not the Accounts were accurate or not, as it was automatically assumed they weren’t, but to decide exactly what kind of fiddle they were on.

Taxpayers Not Robustly Represented

Eventually HMRC realised that these wide ranging leisurely enquiries were not terribly cost effective and they were replaced by a procedure where small business enquiries were mostly carried out by staff with little training in tax or accounts but well briefed in interview tactics and applying pressure. In my experience taxpayers who had this new targeted type of enquiry and who were not robustly represented, were treated unfairly and many ended up paying Tax assessments and penalties, when they’d done very little wrong.

Systems have now changed once again; the ‘scattergun’ approach to enquiries (HMRC’s motto apparently having been quantity not quality) has been heavily modified. But whilst the number of enquiries has been significantly reduced, they are still disproportionally aimed at small business.

Former chair of the Public Accounts Committee, Labour MP Margaret Hodge

Former chair of the Public Accounts Committee, Labour MP Margaret Hodge

When Messrs Hartnett & Troup were pressed by the PAC, they admitted that micro businesses do have a greater chance of being chosen for a tax enquiry, but this was because this type of business is the most likely to commit simple fraud (like omitting cash receipts).

Margaret Hodge scented blood and asked the deadly duo, “On average, how much additional tax is raised from small businesses?” The two protested that they didn’t have this information at their fingertips but didn’t deny Hodge’s suggestion of a few hundred pounds, nor did they deny her comment that the additional Tax raised only barely covered the cost of mounting the enquiry.

Employed individuals have little scope for direct fraud (except for directors of close companies): Large companies will fight expensively all the way to the courts, and will be able because of that, to push hard bargains when it comes to settlement – as in cases which have annoyed the PAC as they seemed to show the Revenue folding too easily.

An Accountant’s View

Image of David Jones Shrewsbury Accountant and Founder of Morgan JonesOnce again, we seem to be going round in circles. Small businesses are continuing to be hounded by HMRC, who have tacitly admitted that overall, they just about cover the costs of mounting these enquiries by the additional tax and penalties raised.

So why oh why, doesn’t HMRC go after the big boys, who openly admit saving tax by the bucket load and who believe that because of their size, they are effectively, untouchable.

In PR terms, of course, HMRC can never win, but that doesn’t mean it shouldn’t try. And they should be seen to try!

 

If any of you would like more detailed information on any aspect of UK Tax Returns, send me an e-mail and I’ll be pleased to advise further.

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