If it feels like HMRC is taking a closer look at small businesses, the numbers suggest that’s exactly what’s happening.
Recent data shows that the average amount recovered by HMRC through investigations into small businesses and individuals has increased by 23% over the last year, rising from £20,100 to £24,700.
At the same time, HMRC concluded around 255,000 investigations during the 2024/25 tax year, generating £6.3 billion in compliance yield.
The message is clear: getting tax wrong is becoming increasingly costly.
Complexity is creating risk
The challenge isn’t simply getting worse because HMRC is becoming more active. The tax system itself is becoming increasingly complex.
According to the Federation of Small Businesses, UK small businesses collectively spend more than 240 million hours a year dealing with tax compliance, at an average cost of around £4,500 per business. For many owner-managed businesses, keeping on top of tax obligations while also running the business is becoming increasingly difficult.
The result is that genuine mistakes are becoming more common, and increasingly expensive.
The areas attracting scrutiny
Many HMRC enquiries arise from areas where the rules are open to interpretation rather than obvious errors.
Some of the most common include:
Business expenses
HMRC will often challenge whether costs have been incurred wholly and exclusively for business purposes.
Where documentation is weak or the business rationale is unclear, expenses can quickly become a point of dispute.
Repairs versus capital expenditure
The distinction between a repair and an improvement remains one of the most common grey areas.
A repair is generally deductible for tax purposes. Capital improvements are treated differently and may only qualify for relief over time.
The difference can have a significant impact on a company’s tax position.
VAT reporting
VAT remains one of the most common triggers for enquiries.
Differences between turnover figures, VAT returns and accounting records can attract attention, particularly where businesses are growing quickly or operating with limited financial oversight.
Cashflow pressure can create problems
Many businesses don’t deliberately set out to underpay tax. Often, the issue starts with cashflow.
VAT can be particularly challenging. A strong trading period may create a significant VAT liability before customers have actually paid their invoices.
Without accurate forecasting and visibility, businesses can find themselves under pressure at exactly the point tax becomes due.
That’s why good financial reporting is about more than compliance. It’s about giving business owners enough visibility to make decisions before issues become problems.
Don’t assume HMRC is always right
Receiving a tax assessment or penalty can feel intimidating. However, that doesn’t automatically mean HMRC’s position is correct.
Many disputes centre on the interpretation of legislation rather than clear-cut errors.
Where a business has maintained robust records and can demonstrate the commercial rationale behind a decision, there may be grounds to challenge an assessment or reduce a penalty.
The key is having the right advice and evidence from the outset. If HMRC contact you with an investigation enquiry regarding your personal or business affairs, it’s vital you respond. Wilson Partners are able to support clients with tax investigations via our fee protection service. Contact the team to find out more.
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