Tax evasion and avoidance are big news these days, and most of us associate them with the multinational corporations and super-rich celebrities we read about in the news. But HMRC recently revealed who the biggest culprits are — SMEs.
SME Tax Evasion
HMRC estimates that they’re owed a total of £5.2bn in evaded tax payments, and of course those are only the debts they know about. Tax evasion, unlike tax avoidance, is not just morally dubious but actually illegal, and evaders can be prosecuted.
51% of this total sum is owed by SMEs. Of course, these individual debts are far less than the large companies found guilty of tax evasion, but the great strength of SMEs is also the great drawback — their numbers. All those relatively small bills add up to more than £2.6bn.
Why SMEs Evade Tax
It’s easy to lump all tax evaders together, but HMRC were interested in the reasons for SMEs evading tax. They interviewed 45 small business owners who’d been caught in tax evasion, and came to the conclusion that they fell into four broad types:
- Unthinking evaders, who withhold the odd amount here and there, probably without considering the implications, and see themselves as law abiding.
- Invested evaders, who act more deliberately and routinely back-date invoices or under-report their cash income.
- Lifestyle evaders, who evade their taxes to fund an unrealistic lifestyle, often justifying it by pointing to the taxes they’ve already paid.
- Systematic evaders, who’ve built often quite complex schemes into their business model.
All of these, according to HMRC “believed they had little chance of being caught and few had any understanding of the potential scale of financial penalties.” Perhaps, also, they assumed that HMRC would be concentrating on the “big boys”, rather than them.
In fact, to some extent the reverse is true. Giant corporations have expert advice in avoiding their taxes by staying marginally within the law as it stands. If they do get taken to court, they can hire top lawyers who’ll come up with a hundred and one reasons why they haven’t really broken the law.
SMEs can’t afford any of this. They’re an easy target — but that doesn’t mean they’re being victimised. Tax evasion is against the law, and the law has the perfect right to impose harsh penalties if you’re guilty — regardless of who else you might consider has got away with it.
If you’re not sure where you stand with your tax liabilities, feel free to give me a call, and I’ll point you in the right direction.