An analysis conducted by accounting firm UHY Hacker Young of figures released by the UK's HM Revenue & Customs has shown that the tax authority's recent 'no mercy' approach has resulted in a 64% jump in tax clawed back through compliance work since 2005/06, with a total of GBP39.5bn received from tax investigation work since April 2005, when the Inland Revenue and Customs & Excise Department merged.

Enquiries into large businesses were found to be the most lucrative activity, generating GBP12.6bn over that period.

However, the amount of revenue clawed back as a result of non-compliance investigations into small businesses and the self-employed has been declining for the past two years, and yielded just GBP359mn of additional tax last year.

UHY Hacker Young tax partner, Roy Maugham observed that the diminishing level of additional tax clawed from smaller businesses suggests that HMRC may be spending a "disproportionate amount" of time and resources investigating the SME sector.

He argued that: “Considering the relatively modest amounts of money that HMRC collects through self-assessment enquiries into SMEs you have to ask whether smaller businesses really deserve all the scrutiny they receive. SMEs feel the burden of tax enquiries much more acutely than larger companies.”

Meanwhile, Simon Newark, VAT Partner at UHY Hacker Young, explained that where there are major VAT problems in the SME sector it is usually caused by criminal gangs organising “carousel”-type frauds, but that this problem is specific to certain kinds of business (namely those which trade in relatively high value commoditised products, such as mobile phones or computer chips and now carbon credits), which rules out 95% of small businesses just on the basis of their type of trade.

Mr Newark suggested that: “Whilst HMRC has been very successful in combating carousel fraud, there has been a lot of collateral damage with numerous legitimate businesses having their VAT repayments frozen by HMRC.”

“The dramatic increase in additional VAT raised from SMEs also bears out the more hawkish approach we have seen from HMRC aimed particularly at those businesses that can’t afford to appeal against HMRC’s VAT assessments.”

The accounting firm went on to posit that the steep rise in extra tax acquired through compliance investigations at least partly reflects the increasing complexity of the UK tax system, which is resulting in an increasing number of mistakes being made by taxpayers.

Roy Maugham observed that: “The amount of money that HMRC is taking in through compliance work is huge but this hasn’t come without significant costs to innocent taxpayers.”

He continued: “HMRC is also using increasingly controversial methods to tackle tax evasion. Purchasing offshore bank account details that have been stolen by criminals, for example, now seems a perfectly legitimate tactic to HMRC.”

And concluded by warning that: “With the current state of the public finances HMRC’s aggressive stance on tax investigation work is likely to become ever tougher.”