Limited company contractors could be squarely in HMRC’s sights for increased compliance action. This follows a sharp increase in the small business ‘tax gap’ – what HMRC believes should be paid and what actually is paid in corporation tax.
The tax gap for small to medium sized enterprises (SMEs), which includes contractors’ limited companies, has risen from £2bn in 2010-11 to £2.3bn in 2011-12. HMRC’s figures show it expects to generate £300m through its investigations’ compliance yield.
Overall, the tax gap rose to £35bn in 2011-12, from £34bn the previous year. However, despite the increase in absolute terms, the tax gap has actually shrunk, from 7.1% in 2010-11 to 7% in 2011-12.
“These figures show the tax gap is continuing to fall,” explained Exchequer Secretary David Gauke. “The vast majority of businesses and individuals pay the taxes they owe. But where they don’t it is for HMRC to challenge non-compliance fiercely, protecting money that would otherwise be lost.”
Pinsent Masons’ Jason Collins told Out-law.com that he believes that HMRC will be under pressure to deliver more from compliance: “With a deficit to be plugged we can expect that HM Treasury will continue to focus on tax investigations work.”
HMRC is under fire from ones of its fiercest critics, Public Accounts Committee (PAC) chairman Margaret Hodge, who told the Independent that she would be “recalling the head of HMRC” to find out why HMRC has failed to collect the tax it was due.
“I am really disappointed that, despite all the public concern expressed by hardworking people who do pay their taxes, there has not been greater success,” Hodge explained to the Independent’s Oliver Wright.
Limited company contractors, traditionally considered by HMRC to be a soft target because many lack the resources to fight investigations, may have increasing cause for concern.
During 2011-12, 36% of SMEs that underwent an HMRC corporation tax investigation were found to owe more than they had originally declared in their tax return, and 18% of these were for amounts over £1,000.