HM Revenue & Customs has sharply increased the amount it recovers from tax investigations into individuals and small businesses, amid growing concerns over the complexity of the UK tax system and rising compliance burdens.
The tax authority closed around 255,000 investigations into small businesses and individuals last year, recovering a total of £6.3 billion in additional compliance revenue, according to analysis from accountancy group UHY Hacker Young.
The average yield per investigation rose by 23 per cent over the year, increasing to £24,700 from £20,100 previously, highlighting what advisers describe as a combination of stricter enforcement and increasingly complex tax rules.
The figures come as HMRC continues to step up scrutiny of smaller businesses and self-employed taxpayers, with professionals warning that many are struggling to keep pace with frequent changes to tax legislation.
Phil Kinzett-Evans, a partner at UHY Hacker Young, said the rising tax take was being driven in part by the system’s growing complexity.
“Significant changes to the way buy-to-let investments are taxed, for example, mortgage interest relief, have led to confusion amongst amateur property investors,” he said.
He added that small businesses in particular were facing mounting administrative pressure as tax requirements became more detailed and time-consuming.
“Many small businesses don’t have the capacity to deal with the level of detail and box-ticking required to submit complex tax returns, so it is no surprise they are making more mistakes,” he said.
The Corporation Tax 600 form, used by small companies to report liabilities to HMRC, contains more than 200 separate fields that may need to be completed, along with a further 12 supplementary forms depending on the nature of the business.
Advisers say this complexity is contributing to higher compliance costs, with small firms reportedly spending an average of £4,500 a year on tax administration — equivalent to 44 hours of work per business and an estimated 242 million hours across the UK economy.
Business owners also face additional pressure from quarterly VAT payment requirements, which can create cashflow strain when liabilities fall due before revenues have been fully collected.
Kinzett-Evans said this can, in some cases, lead to reporting errors.
“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,” he said. “That pressure can lead some to under-declare income simply to meet their tax bills.”
HMRC has also faced scrutiny over its approach to penalties and enforcement, with advisers urging small businesses to challenge penalties where appropriate, particularly in cases involving unclear or disputed interpretations of tax rules.
Common areas of dispute include whether expenses are genuinely business-related or personal in nature, as well as whether repairs should be treated as allowable costs or capital expenditure.
Advisers also encourage struggling firms to negotiate “Time to Pay” arrangements with HMRC, which allow liabilities to be spread over a longer period to avoid the need for asset sales or business disruption.
“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,” Kinzett-Evans said.
The figures are likely to fuel debate over whether the UK’s tax system has become too complex for smaller operators to navigate without professional support, and whether enforcement is keeping pace with that complexity.
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