HMRC’s plan to recruit 5,000 new tax inspectors marks one of the department’s largest expansions in recent years, signalling a heightened focus on tackling the UK’s growing tax gap. This initiative is part of a broader effort to recover billions of pounds in unpaid taxes, with an emphasis on small businesses, which account for £24.1 billion of the current tax gap.
This recruitment drive will bring HMRC’s compliance staff to an estimated 37,000 by 2025, reflecting the government’s commitment to stricter enforcement. Andrew Park, investigations partner at Price Bailey, emphasised the scale of this new approach:
“To make a serious dent in the tax gap, HMRC will need to go after a vast swathe of working people on ordinary incomes.”
The department has shifted its focus from high-profile offshore tax evasion cases to targeting smaller entities and their directors, whose collective underpayments have grown significantly. While the plan aims to recover £6.5 billion in revenue by 2029/30, it has sparked concerns among small business owners, who fear increased audits, delays, and penalties.
Why Small Businesses Are in the Spotlight
Small businesses now account for 60% of the total tax gap, a significant increase from 44% in 2018–19. HMRC attributes this growing gap to widespread errors and misreporting among smaller enterprises, particularly in areas such as business expenses and VAT returns. With rising costs, including the National Living Wage and National Insurance contributions, many small businesses are struggling to keep pace with tax compliance requirements.
The department has outlined several common issues that inspectors will focus on during investigations:
- Improper expense claims: Personal purchases such as suits, leisure travel, and unusual items like hovercrafts are often claimed incorrectly.
- VAT errors: Misreported VAT on invoices or under-declared sales.
- Undeclared income: Failure to declare all sources of revenue, particularly for cash-based businesses.
This intensified focus on small businesses raises important questions about fairness. While these enterprises are often seen as easier targets for enforcement due to their limited resources, critics argue that the government is neglecting larger systemic issues in the tax system.
Criticism of HMRC’s Approach
The decision to focus on small businesses has drawn significant criticism from tax experts and business advocates, who believe the strategy unfairly burdens ordinary earners and small business owners. Andrew Park, in his analysis, called out the government’s prior focus on offshore tax evasion as being politically motivated but ultimately ineffective:
“It was clear to anyone looking closely at the numbers that the Government’s plan to slash the tax gap by targeting wealthy individuals with offshore assets was fanciful. It was simply a politically expedient thing to say.”
He added that HMRC’s shift toward small businesses represents a practical but problematic solution, as it risks penalising entrepreneurs who may lack the expertise or resources to navigate complex tax codes. Many of these individuals face challenges related to unclear rules and inconsistent enforcement, which could exacerbate existing difficulties.
Further concerns have been raised about the potential for inconsistent application of penalties and interest charges. As HMRC ramps up its investigations, small business owners worry that even minor, unintentional errors could result in disproportionate consequences.
Heightened Compliance Risks for Small Businesses
As HMRC recruits its expanded team, small businesses are expected to face increased scrutiny in the coming years. Investigations are likely to be more comprehensive, with inspectors reviewing multiple years of accounts and targeting both businesses and their directors.
Key Risks for Businesses:
- Expense Claims Under the Microscope: HMRC is expected to challenge any claims that appear excessive or personal in nature, such as clothing, travel, or equipment not directly tied to business operations.
- Parallel Investigations: Both company accounts and personal finances of directors will come under review, increasing the complexity of compliance.
- Delays in Resolution: Larger case volumes and increased administrative workloads could result in longer wait times for businesses seeking clarity on their tax obligations.
Andrew Park also warned that these changes could disproportionately affect small businesses that already struggle to keep up with tax demands, leading to unnecessary financial strain and disputes.
Protecting Your Business from HMRC Audits
Given the heightened enforcement environment, tax experts are urging small business owners to take proactive steps to safeguard their operations against potential investigations. Maintaining accurate and thorough records is now more critical than ever.
Practical Steps to Stay Compliant:
- Review Expense Policies: Ensure all business expenses meet HMRC guidelines and are clearly documented with receipts or invoices.
- Conduct Regular Audits: Periodically review financial records to identify and correct errors before they escalate into issues during an HMRC investigation.
- Seek Professional Advice: Engage with tax advisors to navigate complex regulations and ensure compliance with evolving rules.
- Invest in Accounting Software: Use tools that automate record-keeping and reporting, reducing the likelihood of errors.
Taking these steps can help businesses mitigate the risk of penalties, delays, or prolonged audits as HMRC intensifies its oversight.
The Road Ahead
As HMRC moves forward with its plan to recruit 5,000 additional tax inspectors, the coming years will undoubtedly see increased scrutiny on small businesses. While the government’s goal of reducing the tax gap is an important one, critics argue that focusing heavily on small enterprises risks alienating a vital segment of the economy.
For small business owners, the message is clear: preparation is key. By staying informed and maintaining diligent financial records, businesses can better navigate this new era of heightened tax enforcement and avoid unnecessary challenges. At the same time, policymakers must consider the potential long-term effects of their approach, balancing the need for revenue recovery with fairness and practicality for UK businesses.
