In recent years, HMRC tax investigations have increasingly focused on small and medium-sized enterprises (SMEs), and this trend looks set to continue with the creation of HMRC’s new small business evasion and enforcement team.

Once perceived as low risk and with limited yield, smaller businesses are now firmly within HMRC’s sights. Digital tools, data analytics and the Connect system now allow investigators to identify discrepancies more easily than ever before.

For many SME owners, a tax enquiry can arrive unexpectedly and often at the busiest point in the trading year. Understanding why HMRC targets SMEs and how to respond effectively is the first step in managing the process with confidence.

Why HMRC is targeting smaller businesses

HMRC estimates SME’s account for 60% of the ‘tax gap.’ The tax gap is the difference between the tax which should be collected each year and the tax that is collected. For 2023/24, the tax gap is estimated to be £46.8 billion. This means SMEs account for approximately £28 billion in unpaid tax, making them a primary target for a cash-strapped government.

Improvements in data analytics, information sharing, and AI means HMRC’s systems can now cross-check VAT returns, payroll submissions, self-assessment data and banking information to identify anomalies. HMRC will also compare businesses in the same sector to flag those whose margins appear inconsistent with industry averages, suggesting undeclared income or inflated expenses.

SMEs are particularly exposed because:

• Cash flow and record-keeping challenges can lead to innocent discrepancies.

• Rapid growth or new trading activity exacerbates record keeping issues and may trigger data mismatches across different systems.

• Hybrid or online sales models create complexity around VAT, PAYE, and expense treatment.

Even a minor inconsistency, such as a mismatch between turnover on VAT and corporation tax returns could prompt HMRC to open an enquiry.

What an HMRC tax investigation involves

HMRC may begin with a compliance check or aspect enquiry, focusing on a particular area such as VAT, PAYE, or expenses. In more complex cases, this can escalate into a full tax investigation, requiring detailed financial evidence across several years.

While this process can feel daunting, working with a tax investigations specialist ensures every step, from correspondence to disclosure, is managed correctly. A professional adviser can interpret HMRC’s requests, identify what triggered the enquiry, and prevent unnecessary escalation.

How SMEs can prepare

Preparation and proactive advice are the best ways to protect your business:

1. Review financial data regularly to ensure VAT, payroll, and accounts are consistent across all filings.

2. Maintain strong documentation by keeping records of expenses, director loans, and dividends to justify entries.

3. Check for triggers such as sudden profit changes, large write-offs, or unusual patterns that are likely to invite HMRC scrutiny.

4. Seek professional advice early and consult an advisor before responding to HMRC to ensure you understand the full context of their enquiry.

An HMRC enquiry is rarely random – the key is to respond strategically, not reactively.

Antony Greenwood

How Buzzacott can help

Buzzacott’s Tax Dispute and Investigations team works with SMEs across all sectors to manage HMRC enquiries efficiently and discreetly.

Our specialists:

• Analyse the cause and scope of the investigation.

• Communicate directly with HMRC to protect your position.

• Prepare disclosures, negotiate settlements and reduce penalties.

• Offer ongoing compliance reviews to prevent future issues.

With experience of issues which typically affect SME’s and knowledge of HMRC’s Connect technology, and HMRC processes and terminology, we help businesses respond confidently and maintain trust with HMRC while minimising costs and disruption.

SMEs are now firmly within HMRC’s digital spotlight. However, with accurate records, proactive compliance, and expert representation, a tax investigation doesn’t have to become a crisis.