The taxman collected an extra £3.75bn from VAT investigations into small businesses last year

The taxman collected an extra £3.75bn from small and mid-sized businesses (SMEs) last year through investigations into the underpayment of VAT, up 12 per cent on the previous year.

The extra revenue HM Revenue and Customs (HMRC) collected through VAT investigations made up half of all revenue collected through investigations into SMEs in 2017/18, according to tax experts PfP.

In 2016/17, the latest year for which data is available, HMRC said it believed businesses underpaid £11.7bn in VAT, a 10 per cent increase from £10.6bn the year before.

PfP said HMRC has become more adept at reacting to any potential underpayment by businesses, with VAT receipts hitting a record high of £125bn last year, up 60 per cent from £78bn a decade ago. VAT now represents over a fifth of total tax receipts.

Kevin Igoe, managing director at PfP, says: “HMRC is clearly finding VAT investigations into SMEs fruitful so businesses can expect more of the same over the coming year.

“VAT become a large component of total receipts so we will likely see HMRC bulking out its compliance teams to ensure that it squeezes as much as it can from businesses in this area.”

“Investigations really take their toll on small businesses as managers get sucked in at the expense of day-to-day management and strategic planning. Investigations can also substantially increase legal spend, using up resources that may have been earmarked for elsewhere.”