HMRC continues crackdown on small business

Number of individuals prosecuted jumps 53% in one year as asset seizures over unpaid VAT double

Arrests and asset seizures by the HM Revenue and Customs have dramatically increased in the last year as the department continues to pursue an aggressive strategy over unpaid tax from small firms and sole traders.

Research from law firm Pinsent Masons showed that the number of individuals that the HMRC prosecuted in the criminal courts over tax fraud issues jumped to 240 in 2012 from 157 the year before – an increase of 53%.

The firm attributed the increasing tendency of HMRC to use criminal rather than civil procedures to enforce compliance to a wider aggressive approach following a £900m boost in government funding for tax avoidance and evasion work.

Jason Collins, head of tax at Pinsent Masons, said: “HMRC has been using the £900m in extra funding for tax avoidance and evasion work announced in 2010 to increase the number of criminal investigations it opens and the speed with which it gets cases to the Crown Prosecution Service.

“HMRC has adopted a very aggressive stance towards investigating individuals suspected of tax fraud. It is much more willing to opt for the criminal – as opposed to civil – investigative weapons in its arsenal. Arrests, prosecutions and property searches have all leapt since 2010.”

Further research this week from finance provider Syscap also highlighted a doubling of asset seizures by the HMRC in respect of unpaid VAT, under a process known as distraint. The process was used 4,746 times in the last year to speed up the payment of VAT compared to 2,401 times the year before – an increase of 98%.

VAT is currently at its highest ever level at 20%, and as it is payable on invoiced work rather than receipts small businesses could find themselves at increased risk as they are forced to pay tax on work they have not yet been paid for.

The increase also coincides with the scaling back of the ‘Time to Pay’ scheme, in which businesses could agree a payment timetable with the HMRC to avoid sanctions.

Philip White, chief executive of Syscap, said: “Small businesses need to be aware that HMRC is becoming more and more aggressive in claiming the VAT payments it is due from businesses.

“Prior to the credit crunch, banks were offering more credit to SMEs, so businesses could fund their VAT bills through loans or overdrafts. Since then, however, capital adequacy rules have forced banks to rein in their lending, which has made it more difficult for SMEs to rely on bank funding alone.”

HMRC’s increasing rate of seizures and prosecutions is part of a wider pattern of increasingly draconian sanctions to enforce compliance amongst small businesses; in 2012 intake from investigations into IR35 tax abuse increased fivefold and revenue from personal tax investigations grew by 64%. This year, approximately 750,000 small businesses looked set to be penalised for failing to file their tax returns on time.

Jason Collins commented: “We’d like to see more emphasis from HMRC on civil procedures or improving the amnesties that are available to resolve tax avoidance or tax evasion issues.

“Criminal investigations are only part of the broader picture that HMRC needs to consider when boosting tax yields. An improved amnesty for tax avoidance schemes should be part of the mix too.”


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