I was amazed to see the comment in the press this week that “SME’s dodge the most tax” following figures released from HMRC showing that small to medium sized businesses are responsible for 51% of the £5.2bn “tax gap” between what is owed and what is paid.
HMRC went on to say that it divided small companies that avoid tax in to four categories; the “unthinking evader” who engages in habitual “low level evasion”, the “invested evader” who sees tax evasion as an “unfortunate financial necessity”, the “lifestyle evaders” who seek a better way of life and fund this through not paying their tax, and the “systematic evaders” who engage in more complex schemes and consider their misconduct as “integral to the business model”. HMRC went on to say that all four categories were found to believe that they had little chance of being caught and few had “any understanding of the potential scale of the financial penalties.”
We all probably know of someone that falls in to at least one of these categories - in my line of work I have probably come across most of them at one time or another.
It seems more recently that it has become socially unacceptable for individuals or businesses to avoid tax. You see comments that suggest that business should pay tax because of a high turnover, but tax is on profit which many commenters seem to miss. Also, there is a difference between evasion - which we all agree is wrong - and making sure you have the correct structure in place for you and your business to ensure you are paying the appropriate amount of tax rather than too much. It is also important to check that you are claiming the right reliefs, such as capital allowances or research and development tax credits, to name two.
What is apparent, is that HMRC have these four categories of businesses in their sights and have recently upped their game by investing large amounts in technology and investigators so they can catch these types of four businesses out and bring them to justice. HMRC have the power to investigate anyone’s tax affairs when they want and this can be a very stressful and costly exercise for an individual to defend.
The penalties if HMRC find you out are severe. They will want the tax paid that you have avoided, plus interest, and can impose on you a penalty of up to 100% of the tax on the income you didn’t declare. If they can prove you were fraudulent they could prosecute you.
If you do find yourself under investigation and you know you haven’t declared all of your income, get some professional help from an Accountant that specialises in tax investigations.
If you are in business make sure you are getting decent advice from your advisers, that you have your affairs structured correctly to maximise your tax planning opportunities within the law and that you are utilising any reliefs that you are entitled to claim.
It is a fact that HMRC are becoming more aggressive in finding tax that has been avoided, so as a result we are seeing more and more investigations in to the tax affairs of businesses and of individuals. Even businesses that have nothing to hide and are playing by the rules are being investigated. It is costly to defend your position, so make sure you have fee protection in place that covers your costs should you get investigated.