The number of VAT investigations launched by HM Revenue & Customs (HMRC) into SMEs and the amount of fines imposed for late VAT payments both increased last year, new research reveals.
In the 12 months to 31 March 2025, law firm Pinsent Masons found that VAT investigations opened into small businesses rose to 94,022, up from 90,166 the year before, while the number of investigations opened by the Wealthy and Mid-Sized Business Compliance unit was 11,256, compared to 8,451 in 2023-24.
The increases came as HMRC looks to close the VAT tax gap. The tax authority has calculated that underpaid VAT jumped from £8.9 billion to £11.4 billion.
Bryn Reynolds, partner at Pinsent Masons, said:
“HMRC has got every encouragement it needs from HM Treasury to open more investigations and dig deeper. The amount of extra resource that HMRC has been given to undertake those tax investigations by the chancellor has been really striking.
“VAT is a notoriously complex area, where small differences in fact pattern can result in large VAT assessments. Given a VAT assessment can be existential to a business, there is a high risk of disputes between businesses and HMRC.”
HMRC has also increased the amount of fines imposed on businesses for late payment of VAT.
Accountants Lubbock Fine found that 582,000 financial penalties were levied on businesses for late payment of VAT in the 12 months to 31 July, up from 569,000 over the previous 12 months. Fines totalled £302 million, compared to £294 million in the previous year.
Lubbock Fine’s Jaspal Dhillon said the increase in fines shows how businesses are struggling under growing costs, regulatory burdens and an uncertain economic environment.
He added that another factor is the VAT late payment penalties system, introduced in 2023, through which companies face more regular fines. They get a penalty equal to 3% of the outstanding VAT after 16 days overdue, then a further penalty worth 3% at 31 days.
“If you’re a struggling business, the first thing you need to do is make sure your returns are filed on time and that you have requested a Time To Pay Arrangement from HMRC, as it can be the difference between survival and failure”, Dhillon advised.
“Ultimately, HMRC will be much tougher with businesses that hide their head in the sand and ignore their overdue tax bills.”
According to HMRC, overdue tax debts owed to it amounted to £42.8 billion for the 2024/25 financial year.