Press release by PfP – HMRC has raised an additional £3.5bn in the last year through inquiries into the under-payment of VAT by small businesses, says PfP, the experts in tax investigation insurance.

PfP says that additional VAT revenue accounted for almost half (45%) of the additional tax take in 2014/15 from investigations by HMRC’s local compliance teams, which are responsible for small and medium-sized businesses. The total sum raised through tax investigations by local compliance teams last year was £7.7bn.

The figures show that VAT is a key area of focus for HMRC as it looks to maximise tax revenue. PfP adds that this trend is likely to be ongoing as a small number of rogue SMEs attempt to evade VAT – placing those who make innocent mistakes on their returns in the firing line as a result.

Pressure on SMEs is also likely to increase as HMRC announces the closure of 170 of its regional offices, in favour of employing specialist taskforces to carry out tax-related investigations.

Kevin Igoe, Managing Director of PfP, comments: "VAT investigations represent a rich seam for HMRC and the area is coming under increasing focus as a result."

"A ‘hardcore’ of tax-evading small businesses are making life difficult for the vast majority of compliant SMEs, and leaving them facing investigations over genuine oversights and errors."

"Through no fault of their own, a lot of small businesses are coming under greater scrutiny, and facing expensive and time-consuming investigations. SMEs need to be particularly wary of potential pitfalls when submitting information to HMRC and ensure they are on top of their accounts at all times."

In addition to the employment of taskforces, HMRC has also invested £80m in the optimisation of Connect – computer software especially developed to access and trawl databases of personal and commercial financial information on an unparalleled scale. Data is collected from a number of sources, including banks, local councils, legal aid data and even social media.

Connect is able to cross-reference its findings with the information submitted to HMRC by an individual or business. As of September 2016, its powers will be extended further still as it is granted access to files held by banks and other financial institutions based in British overseas territories.

Kevin Igoe, says: "It is easy for small businesses to trip up when it comes to filing VAT returns and HMRC is constantly sharpening its senses to catch them out when this happens."

"VAT is an area that has been abused by some small businesses, and is therefore one that HMRC pays particular attention to."

"The Connect database and the employment of the highly efficient taskforces are forming a pincer movement on those who either intentionally, or more likely unintentionally, report incorrectly on their VAT returns."