SME Directors Under the Spotlight Again – HMRC Still Cracking Down

Despite the fact that the tax gap in the UK is at a record low, HMRC is using various novel techniques to ensure that SMEs are paying the right amount of tax.

The mentioned tax gap just refers to the difference between the amount of tax HMRC estimate that they are owed and the amount that is eventually collected.

Each year, HMRC publishes a report on this, and the latest figures available (published toward the end of 2016) show that 6% of all potential revenue has remained unpaid.

Despite the fact that the unpaid amount is £36bn, this really is a record low – the gap has never been smaller since comparative analysis began.

Tax avoidance has been on HMRC’s priority list since 2010. Almost £2bn has been spent on updated IT collection and data systems, and £1.8bn on compliance capabilities – these have evidently proved to be successful strategies.

Money has also been invested into using celebrities and prominent figures to effectively endorse having ‘good tax affairs’ – for example, the Honours system has recently been in the limelight.

Of course, criticism remains over HMRC’s failure to focus on profit shifting, the use of tax havens and similar methods used by multi-national Plcs in an effort to avoid paying tax owed.

However, the fact that half of all uncollected tax was owed by SMEs does suggest that HMRC have a reason for focusing their attention where they are.

The Enterprise Act was reformed in 2002, and following this the crown preferential status was lost.

In other words, when companies become insolvent, it is possible for companies to use the money they owe for tax to be used as working capital in order to keep their business afloat.

HMRC have obviously brought about these extra measures to avoid potential liability to themselves and promote tax compliance.

Below, we have outlined a few methods HMRC are using to stop tax avoidance from happening.

Security

Increasingly, HMRC are demanding security from companies to potentially override their protection from personal liabilities.

In cases where directors have failed to comply with their tax obligations, a notice may be issued with demands for security to be given within 30 days, making the directors personally liable for the debt.

Failure to do so is a criminal offence, and could accrue fines of up to £5,000.

In the past, these methods were used solely for seeking VAT bonds for those that have opened a ‘phoenix business’, but increasingly, they are now used in many more cases.

HMRC’s APNs

Accelerated Payment Notices (APNs) have also been used to tackle tax avoidance in recent months.

These are used for those who have entered into a tax scheme that may liable to become under scrutiny, and must be paid within 90 days.

More than £3bn has been raised using this method alone, since APNs were introduced in 2014.

Personally liable? – the insolvency regime

A way of policing directors that is often forgotten is through the use of the Insolvency Regime – this is the method that dictates that a director can lose their privilege to limited liability if they have committed misfeasance or wrongful conduct.

For some time, HMRC has used Official Receiver IPs (Insolvency Practitioners, or liquidators) to investigate company proceedings.

The primary problems they find tend to be misuse of directors’ loan accounts, making preferential payments and other breaches of duty towards the company’s creditors.

Personal liability for the company’s debts will follow where directors are found guilty of these offences, which is used by HMRC of course as a source of capital return to the crown, but also to deter others and decrease the individual’s ability to set up a further business due to financial constraints.

Personal liability notices

Another power that is being used increasingly by HMRC are PLNs (Personal Liability Notices).

These were rarely seen a few years ago, but these are now being used against anyone responsible for non-payment of tax – it’s not just directors that can become personally liable for evading tax!

A PLN will be used in cases where fraud or neglect has been found – in the past these were used solely for PAYE debts, but progressively these are being put in place with regards to VAT and other tax arrears.

Beware

The current climate of the public and of course the parliament putting an emphasis on prompt tax collection has sparked this trend to attempt to narrow the tax gap.

Whilst multinational companies and celebrities tend to attract the headlines, the real front line, in reality, is in the SME sector; directors and financial controllers are increasingly under the spotlight.

So, if you are considering using your tax reserves to use as working business capital, think again!

If you are in HMRC arrears already and are looking for advice, don’t hesitate; call us now on 01472 254914.