SMALL businesses are “easy prey” for the taxman as they experience a big increase in the number of tax inspections, accountants said yesterday.

A study by Abbey Tax Protection of more than 2,500 claims between 1997 and 2005 found that nearly 50 per cent of investigations are undertaken into traders with less than £50,000 in turnover. In 2004 that figure was 54 per cent.

Since the advent of the self-assessment tax system in 1996, the Inland Revenue, now HM Revenue & Customs (HMRC), can conduct random investigations against businesses and private individuals without giving reasons for the inquiry.

However, according to the study, the crackdown has generated only a small increase in the amount of money received by the HMRC.

In 2003, the average length of investigation was 19 months. In the 2003-04 tax year, the Inland Revenue collected an additional £281.1 million from employer compliance reviews. Compared with the previous year, the yield from employer compliance disputes was up by 9 per cent. Only 10 per cent of the investigations HMRC undertook revealed a significant evasion of tax. The majority of investigations were settled without any significant additional tax and in eight out of ten enquiries the cost of dealing with the case exceeded the additional tax, interest and penalties due.

Colin Davison, chief executive of Abbey Tax Protection, said: “Revenue investigations are on the increase and their attitude is hardening. There is no respite for the small cash businesses, who continue to be easy prey for the Revenue inspectors.”

Simon Davies, business development manager at Haslers, the chartered accountants. said: “They (HMRC) appear to be using the investigations as a way of generating increased revenue.”

He added that all employers are likely to have an audit visit every five years. “No business is safe,” he said. “HMRC can demand to review their accounts, both business and personal and search their property. This can be very scary for a small business person who is concientious about paying their taxes. We have a case where an additional £1,500 in tax was recovered, but the accountant’s fees to represent and defend the business exceeded £15,000. Small businesses often find the cost of using intermediaries, such as accountants, prohibitively expensive.”

An official from the HMRC denied that small businesses were being picked on. She said: “The number of small businesses investigated is proportional to the number of businesses investigated overall.”

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