HM Revenue & Customs is recovering significantly more money from tax investigations into individuals and small businesses, as advisers warn that growing complexity in the tax system is driving errors and compliance costs.
The average yield from each investigation rose by 23 per cent over the past year to £24,700, up from £20,100 previously, according to analysis by accountancy group UHY Hacker Young.
Overall, HMRC closed around 255,000 investigations last year, recovering £6.3bn in additional compliance revenue, underscoring the scale of enforcement activity targeting smaller taxpayers.
Officials say the figures reflect a sustained effort to close the tax gap and improve compliance, with investigations increasingly focused on areas where mistakes are more likely rather than deliberate evasion.
But tax advisers argue that the rising returns are being driven at least in part by the growing complexity of the system itself, particularly for small businesses and property investors.
Phil Kinzett-Evans, a partner at UHY Hacker Young, said many smaller operators simply lack the capacity to keep up with what he described as an ever-expanding compliance burden.
He pointed to changes in the taxation of buy-to-let mortgage interest relief as one area where “avoidable errors” have become more common, particularly among amateur landlords navigating shifting rules.
Phil Kinzett-Evans adds: “Most small businesses want to pay their fair share but tax rules hit them disproportionately hard compared to large firms. Too often, tax rules are written as if every business has an accountant, which is far from true.”
More broadly, advisers warn that small firms are increasingly struggling with the sheer volume of administrative requirements, as tax legislation becomes more detailed and reporting obligations expand.
One example is the Corporation Tax 600 form, which may require completion of more than 200 separate boxes, along with up to 12 supplementary schedules, depending on the nature of the business.
Small businesses are also estimated to spend an average of £4,500 a year on tax compliance, equivalent to around 44 hours of work annually — a burden that scales up to hundreds of millions of hours across the UK economy.
Evans explains: “A good month of sales at the end of the quarter can trigger a large VAT bill that must be paid before the revenue has been fully collected, sometimes. That pressure can lead some to under-declare income simply to meet their tax bills.”
Additional obligations, such as quarterly VAT submissions, have further increased the administrative load, with accountants warning that the risk of misreporting rises as the system becomes more fragmented and time-consuming.
While HMRC insists its compliance activity targets genuine error and avoidance, critics say the growing reliance on enforcement revenue risks penalising complexity as much as misconduct.
He added: “Fines and tax bills from HMRC can reach tens of thousands of pounds, so small businesses must agree a payment arrangement as early as possible. Otherwise, they risk having to sell valuable assets just to keep going.”
Disputes frequently arise over whether expenses are genuinely business-related, or whether repairs should be treated as capital expenditure rather than deductible costs — distinctions that can carry significant tax consequences.
Where penalties are issued, advisers recommend that businesses challenge decisions where appropriate, particularly on technical grounds, though they caution that successful appeals typically depend on detailed documentation and evidence.
In some cases, businesses are also advised to consider “Time to Pay” arrangements with HMRC, which allow liabilities to be spread over a period rather than settled immediately — a measure accountants say can prevent otherwise viable firms from being forced into asset sales.
As ministers continue to focus on narrowing the tax gap, the tension between enforcement and administrative clarity is becoming more pronounced, particularly for smaller operators already under pressure from rising costs and regulatory demands.
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