With SMEs remaining the biggest contributor to the tax gap, HMRC has improved its recovery rate from investigations into small businesses and individuals. However, there are also warnings that increasingly complex tax rules are causing errors, confusion and avoidable disputes.
HMRC recovered 23% more tax per investigation into small businesses and individuals in 2024-25, reaching an average of £24,700. This was up from £20,100 in the previous tax year.
A total of 255,000 investigations into small businesses and individuals resulted in the discovery of unpaid tax, whether deliberate or accidental. HMRC recovered a record £6.3bn in unpaid tax, according to a freedom of information request by UHY Hacker Young.
This should be seen as a clear warning to taxpayers and their advisers to ensure tax affairs are in order.
Complex rules create compliance risks
For some, the scale of HMRC’s recovery is a sign that the tax rules have become so complicated that SMEs and individual taxpayers are struggling to keep up with a constantly changing tax code.
For example, significant changes to the way buy-to-let investments are taxed, including the treatment of mortgage interest, have caused confusion among some amateur property investors. At the same time, the rise in side hustles, gig work and multiple income streams has created further compliance challenges.
The CT600 form, used by small companies to disclose their corporation tax liability to HMRC, contains more than 200 boxes that may need to be completed. There are also 12 supplementary forms, each with further boxes to fill in.
Compliance costs can also be significant, with small businesses spending more than £4,000 a year on tax administration on average.
VAT and cash flow
Some tax rules, including the requirement to submit VAT returns and make VAT payments on a regular basis, can increase the risk of errors in reporting income to HMRC.
Where appropriate, advisers may wish to consider whether cash accounting could help SME clients manage VAT cash flow. This can be particularly useful where clients experience delays between issuing invoices and receiving payment. However, it will not be suitable for every business, so the client’s circumstances should always be reviewed carefully.
Penalties and HMRC disputes
SMEs should work with their advisers and challenge HMRC penalties where they believe they have complied with the rules.
However, any challenge should be made on technical grounds. In other words, the argument should focus on HMRC’s application of the tax rules, rather than simply arguing that a penalty feels unfair.
Business expenses that HMRC regards as “personal” are a common area of dispute. This can also apply to repairs or refurbishment costs that HMRC treats as capital expenditure, meaning they cannot be deducted immediately for tax purposes.
Making Tax Digital may add further pressure
The arrival of Making Tax Digital for Income Tax is likely to add further pressure for higher earners outside PAYE, including sole traders and landlords with income over £50,000.
HMRC has said the system is intended to make tax administration easier for taxpayers, but many advisers remain concerned about the additional reporting burden.
One saving grace is that HMRC will not apply penalty points for late quarterly updates in the first tax year for those required to use Making Tax Digital for Income Tax from 6 April 2026. However, penalties can still apply for late tax returns or late payment of tax, so clients should not treat the first year as a reason to delay preparation.
Final reminder for advisers
The figures highlight the importance of regular tax health checks for SME clients. With HMRC recovering more tax per investigation, advisers should encourage clients to review their records, understand their filing obligations and address potential compliance risks before HMRC raises questions.
This article is based on original reporting by Sara White, Editor, Business & Accountancy Daily.
