Limited company contractors dread tax investigations

Some business owners have already paid HMRC, even when they believe the revenue to be wrong, just to avoid the financial pressure caused by an investigation. Compared to the cost of fighting a dispute, companies have been paying up small contested amounts and cutting their losses.

Loss of staffing resources is another problem faced by smaller companies when they come under the revenue's spotlight. The contractor is likely to be tied up dealing with the investigation taking them away from the important day-to-day duties necessary to keep the business running smoothly.

A spokesman for Baker Tilly said that they had been seeing cases where limited company contractors have disagreed with the revenue's tax demand but have said it's not worth the aggravation and cost to pursue the matter.

HMRC is under increasing pressure from the government and they now have to cope with a smaller workforce. There are fears that this could lead to an increase in the number of investigations.

The taxman may be better advised to focus their attention on large companies. UHY Hacker Young has discovered that tax investigations into big businesses are 18 times more productive than those into SMEs.

During 2008/09, every £1 spent by HMRC on investigating multinationals reaped in £181 of tax. That's a stark contrast to the £10 clawed back for every £1 spent investigating SMEs and private individuals.

In the last year, HMRC has generated £4.9 billion through tax investigations into multinationals, but only £359 million from enquiries into Self Assessment business and personal tax.

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