Why HMRC Is Focusing More on Small Businesses and How to Stay Compliant

If you run a small business in the UK, HMRC is paying closer attention to your tax affairs than ever before. The latest published tax gap figures estimate the shortfall at £46.8 billion for 2023 to 2024. Small businesses account for the largest share by customer group, at 60 percent of the overall tax gap, equal to around £28 billion.

That is one of the main reasons your accounts, VAT, payroll, corporation tax, and self-assessment returns are being reviewed more closely than they were 5 years ago. HMRC has also reported record compliance yield of £48.0 billion in 2024 to 2025 and completed 316,000 compliance checks during the year.

The good news is that staying compliant is entirely within your control. With the right systems, a tidy paper trail, and proactive advice from experienced accountants in Slough, you can sleep soundly knowing your records will stand up to any enquiry HMRC sends your way.

Why HMRC Has Turned Its Attention to Small Businesses

HMRC has invested heavily in technology, staff, and data sharing over the last few years. Its data-matching systems allow information from tax returns, Companies House, banks, property records, online platforms, employers, and other third-party sources to be compared more efficiently. That means a small bookshop in Slough or a self-employed plumber in Reading can be checked against several data points before HMRC contacts them.

A few other factors are driving the shift in focus:

• Online platforms such as Etsy, Vinted, eBay, and Airbnb must collect seller information and report relevant details to HMRC each year. For example, information collected for the 2024 calendar year was reportable to HMRC by 31 January 2025.
• Making Tax Digital is expanding. MTD for Income Tax started from 6 April 2026 for qualifying sole traders and landlords with income over £50,000, with lower thresholds due to follow in later years.
• Investment in AI, data analysis, and risk profiling is helping HMRC target compliance work more accurately.
• HMRC is recruiting additional compliance staff and modernising its IT and data systems, with a clear focus on closing the tax gap.
• Compliance work is financially effective for HMRC, with the department reporting £48.0 billion of compliance yield in 2024 to 2025.

If you would like a deeper view on how the rules are evolving across the wider tax landscape, the Autumn Budget 2025 summary covers the recent direction of travel.

The Areas HMRC Is Looking at Most Closely

It helps to know where the spotlight is brightest. The table below shows the main areas being targeted, why they matter, and what you should be doing.

Compliance Area	Why HMRC Is Focused on It	What You Should Do
VAT returns	Errors, late registration, and under-declared output tax are common	Use cloud software, file on time, and reconcile monthly
Self-assessment	Side income, rental income, and undeclared earnings are easier to identify	Declare all relevant income and keep supporting records
Payroll and PAYE	RTI errors, wrong tax codes, late submissions, and worker status issues create risk	Run payroll through compliant software and review codes regularly
Corporation tax	Expense claims, profit reporting, dividends, and director transactions can create errors	Keep clean books and take advice before year end
Director loans	Overdrawn loan accounts can trigger section 455 tax if not dealt with correctly	Track balances and clear loans within the required deadline where possible
Cash businesses	Cash suppression and incomplete records remain high-risk areas	Bank takings properly and keep till, invoice, and receipt records
Bookkeeping	Missing, late, or backdated records make enquiries harder to defend	Reconcile regularly using proper accounting software

Each row above represents a live area of HMRC enquiry. You can read about common red flags on tax returns and the most common corporation tax mistakes for more detail on what can trigger an enquiry.

What an HMRC Enquiry Actually Looks Like

An enquiry can come in several forms. A simple aspect enquiry might ask about one specific entry on your return. A full enquiry may examine every figure on your accounts and tax return for a particular year. In serious cases, HMRC can open a Code of Practice 9 investigation, which is reserved for suspected tax fraud.

The financial cost of getting it wrong can be significant. Penalties for careless errors can range from 0 to 30 percent of the extra tax due. Deliberate errors can carry penalties of 20 to 70 percent, while deliberate and concealed errors can attract penalties of 30 to 100 percent. HMRC can also charge interest on late-paid tax.

If you receive a letter, your first call should be to a tax return accountant who can manage the correspondence on your behalf. There is also a useful guide on how an accountant supports you during an HMRC enquiry that is worth reading in advance, not after the letter lands.

Record Keeping Is Your First Line of Defence

The single biggest reason small businesses fall foul of HMRC is poor records. Limited companies usually need to keep company and accounting records for 6 years from the end of the financial year they relate to. Self-employed individuals must generally keep records for at least 5 years after the 31 January submission deadline for the relevant tax year. VAT records usually need to be kept for at least 6 years.

Good record keeping covers:

1. All sales invoices, till records, and receipts.
2. Purchase invoices and expense receipts.
3. Bank statements and reconciled accounts.
4. VAT records where you are registered.
5. PAYE, payroll, and pension records.
6. Mileage logs and vehicle records.
7. Stock records if you sell physical goods.
8. Evidence for any tax reliefs, allowances, or claims made.

If your books are out of date, do not panic. There is a clear path forward in this guide on what to do if your bookkeeping is behind. For ongoing peace of mind, working with a dedicated provider of bookkeeping services means everything is recorded, reconciled, and ready for any review HMRC might launch.

You may also want to weigh up cash basis versus traditional accounting to decide which suits your situation, and the article on monthly bookkeeping with an online accountant is worth a read if you are considering switching to a more digital approach.

VAT Compliance Is Under the Microscope

VAT is one of the most enquiry-prone taxes in the UK. Errors are common because the rules are detailed, rates vary by product or service, and registration deadlines can be missed.

The current VAT registration threshold is taxable turnover of more than £90,000 in any rolling 12-month period. If you exceed the threshold, you must register within 30 days of the end of the month in which you went over it. You must also register if you realise your taxable turnover will exceed £90,000 in the next 30 days alone.

If you are unsure whether you should register or what the implications are, the article on how VAT registration can affect your prices explains the cost and pricing impact in plain English. For the digital side, the MTD for VAT guide explains the software requirements that apply to VAT-registered businesses. There is also a helpful breakdown of bridging software versus cloud accounting if you are still using spreadsheets.

For ongoing compliance, our VAT returns services cover registration, submissions, scheme advice, and dealing with HMRC on your behalf.

Payroll and Off-Payroll Working

Payroll is a regular flashpoint with HMRC. Real-Time Information (RTI) means payroll information must be submitted to HMRC on or before employees are paid, and late filing can lead to automatic penalties. For smaller employers, monthly RTI late filing penalties can start at £100, depending on the number of employees and the circumstances.

Add in pension auto-enrolment, statutory pay, holiday pay, the National Living Wage, and off-payroll working rules, and it is easy to see why employers are stretched.

A few of the issues that catch employers out include:

• The wrong tax code being applied. You can read about the 1257L tax code and what it really means for the most common tax code in the UK.
• Holiday pay calculation errors. There is a detailed walk-through on the calculation of holiday pay.
• Wage rate changes. The minimum living wage rises from April 2025 article is useful background, but employers should also note that from April 2026 the National Living Wage for workers aged 21 and over is £12.71 per hour.
• CIS misclassification. The CIS contractors checklist covers what you need.

Our payroll services Slough clients use combine RTI submissions, pension reporting, payslips, and year-end forms into a single fixed monthly fee.

Self-Assessment and Side Income

If you have a side hustle, rental income, dividends, or income outside PAYE, you may need to file a self-assessment return. The exact position depends on the type of income, the amount earned, and whether any allowances apply.

HMRC now receives more information from online marketplaces and digital platforms, so the era of assuming that small online income will go unnoticed is over. Platform reporting does not automatically mean every casual seller owes tax, but it does mean business-style trading, rental activity, and regular side income are easier for HMRC to identify.

A few articles worth flagging here include:

• The guide to rental income and expenses for landlords.
• The tax returns for landlords walk-through.
• The self-assessment for sole traders overview.
• Information on registering as self-employed in the UK.
• The late tax returns and penalties summary.

If you have made a mistake on a previous return, there is a clear process for amending a tax return, which is usually far cheaper than waiting for HMRC to find the issue.

Limited Company Compliance

If you trade through a limited company, the compliance load steps up. You have to prepare company accounts, file with Companies House, file a Corporation Tax return, run payroll for directors where applicable, manage dividends, and complete the director’s own self-assessment where required.

The article on setting up a limited company in the UK is a useful starting point, and the limited company year-end accounts piece walks you through year end.

Two other areas to be aware of:

• Companies House identity verification became a compulsory part of incorporation and new appointments for new directors and people with significant control from 18 November 2025, with requirements being phased in for existing roles.
• late filing fees at Companies House for private companies and LLPs start at £150 for accounts filed not more than 1 month late and can rise to £1,500 if accounts are more than 6 months late. Penalties can double if accounts are filed late in 2 successive financial years.

If you are considering moving from sole trader to limited company, the tax compliance picture changes significantly, so get advice before you make the switch. Reading-based businesses can speak directly to our accountants in Reading for tailored advice on the local market.

Choosing the Right Software and Adviser

The right software cuts compliance risk dramatically. HMRC’s direction of travel is digital, and good software makes it easier to keep records accurate, submit information on time, and spot issues before they become expensive.

A short list of strong options is in the MTD software shortlist for small businesses article.

Cloud platforms such as QuickBooks pair well with a QuickBooks accountant who can pull live reports, spot anomalies, and produce the financial reporting services you need to run the business properly. There is also a longer look at choosing the right accountant and the differences between online accountants versus traditional firms if you are weighing up your options.

For sole traders specifically, sole trader accounting services cover everything from MTD preparation to your annual tax return. For incorporated businesses, small business accountants provide a full year-round package.

Practical Steps You Can Take This Week

1. Bring your bookkeeping up to date so nothing more than 30 days old sits unreconciled.
2. Check every employee’s tax code against HMRC records.
3. Review your VAT position and confirm whether you are approaching the £90,000 threshold.
4. Confirm director loan accounts are not overdrawn or being left unresolved.
5. Diarise all filing deadlines for the next 12 months.
6. Check whether MTD for Income Tax applies to you from April 2026, 2027, or 2028.
7. Use MTD-compatible software if you are within VAT or Income Tax digital reporting rules.
8. Speak to a qualified accountant about a compliance health check.

Frequently Asked Questions

How likely is HMRC to enquire into my small business?

HMRC completed 316,000 compliance checks in 2024 to 2025. The risk varies by industry, turnover, trading pattern, and the data HMRC holds on you. Cash-heavy sectors, rapid growth, large expense claims, late filings, and inconsistencies compared with earlier years can all increase the likelihood of a closer review.

What records do I legally need to keep?

Limited companies usually need to keep company and accounting records for 6 years from the end of the financial year they relate to. Self-employed individuals must generally keep records for at least 5 years after the 31 January submission deadline for the relevant tax year. VAT records usually need to be kept for at least 6 years. Your records should cover income, expenses, bank statements, invoices, receipts, payroll records, and supporting documents.

Can I deal with an HMRC enquiry on my own?

You can, but it is rarely advisable. An accountant will know what HMRC is allowed to ask, what you are required to provide, and how to negotiate any settlement. The cost of professional representation is usually a fraction of the potential tax, interest, and penalties at stake.

What is the penalty for filing late?

For self-assessment, the initial late filing penalty is £100, even if no tax is due, with further penalties if the return remains outstanding. VAT, PAYE, Corporation Tax, and Companies House accounts have different penalty regimes. The late tax returns and penalties article covers the detail.

Will Making Tax Digital make compliance easier?

For most businesses, yes. Digital records reduce errors and give you better visibility throughout the year rather than leaving everything until year end. However, MTD only helps if the software is set up properly and used consistently. The common MTD mistakes piece is worth a read so you avoid the early pitfalls.

Does HMRC really check online platforms and social media?

HMRC can use information from digital platforms, public sources, and third-party data to compare what has been declared against other available information. Online platform reporting has made this especially important for people earning money through marketplaces, short-term lets, and side income. If your declared income does not match the wider data picture, that mismatch can trigger a closer look.

Stay Ahead of HMRC With the Right Team

Compliance is not about being scared of HMRC. It is about being properly organised. With the right adviser, clean records, and modern software, the burden becomes far lighter and the risks far smaller.

Whether you are a sole trader, a contractor, a landlord, or a growing limited company, Asmat & Co Accountants has nearly 2 decades of experience supporting small businesses across Slough, Reading, and the wider South East.

If you would like a free initial review of your compliance position, get in touch today and we will tell you exactly where you stand and what needs to change. Book a meeting with our team and take the worry out of HMRC once and for all.