The tax office faced accusations of double standards last night over plans to target thousands of small businesses with spot checks on their paperwork – despite letting big companies such as Goldman Sachs off millions of pounds in tax. Officials from HM Revenue and Customs with powers to fine small businesses intend to inspect up to 20,000 firms to see if they have adequate proof of expenses and income dating back years in a new drive set to begin in April.
The move was condemned by Conservative backbenchers and business groups who warned it risked bankrupting some businesses and harming the already depressed economy.
They said it went against a pledge by ministers to cut red tape for companies during the recession and added the arbitrary nature of the unannounced checks amounted to "harassment". "Despite the worsening economy, HMRC is launching this scheme regardless of the consequences," said John Walker, national chairman of the Federation of Small Businesses.
"We have spoken to HMRC and expressed our concerns about this a number of times. But as far as they and ministers are concerned it is a policy aim to make this happen.
"There is a huge difference between the rhetoric of the Government about helping small businesses and what it is doing in reality." Under the plans, up to 20,000 small businesses including restaurants, builders, manufacturers and IT companies will face spot checks on their record keeping.
They will be expected to show receipts for income and expenditure dating back years to back up their tax returns. Those who are unable to do so will face fines of up to £3,000 which business leaders warn could be enough to push some firms into insolvency.
During a pilot exercise last year, 12 per cent of the businesses examined were judged to have record-keeping practices that were significantly sub-standard. If the same percentage was found to be at fault in the full checks total fines could reach £15m. While inspectors have room for leniency, the federation says that revenue officials take a far tougher line with firms unable to employ high-powered accountants to argue their case than with large companies.
The plan is also causing considerable unease among Conservative backbenchers – who believe it undermines David Cameron and George Osborne's pledges to support small businesses.
Priti Patel, the Conservative MP for Witham, said around 80 per cent of her constituents worked in small and medium-sized enterprises and she had dealt with numerous examples of what she described as "harassment" by HMRC.
"This is the persecution of small businesses at a time when they are already facing a very, very hard time," she said.
"The attitude of HMRC to small businesses is frankly disgraceful when they are blatantly doing deals with large firms which have allowed them to escape millions of pounds in tax liabilities. It seems as though HMRC sees small businesses as low-lying fruit to meet their targets. That kind of persecution is outrageous."
Anne-Marie Morris, the Conservative MP for Newton Abbot, a member of the all-party group on micro-businesses, said she was increasingly concerned about HMRC's attitude to small businesses.
"There used to be a different ethos at the revenue where they would look on minor errors sympathetically, but that appears to no longer be the case, and very small businesses are being treated in the same way as larger ones with better resources.
"It is simply not practical for a company employing just a few people to spend huge sections of their day on administration as well as getting their firm off the ground. This is particularly true when you're coming out of a recession."
Last night a spokesman for HMRC said the plans would be subject to a review following problems with the pilot project and played down the threat of fines. "Following consultation with representative bodies, HMRC has started a detailed review of the business records checks project," they said.
"HMRC recognises that the pilots have caused considerable concern to the tax profession, and that the project would have benefited from more detailed consultation with tax professionals at an earlier stage.
"In the light of these concerns, HMRC will undertake a review of the project, in consultation with the professional and representative bodies.
"The purpose of the review is to consider the overall aims of business records checks, examine whether the current approach is the best way of achieving the policy objectives, and identify what changes are needed to ensure that the objectives are achieved.
"In the meantime, HMRC will continue with a limited number of business records check pilots, and the results will be evaluated as part of the review."
But the shadow Business Secretary Chuka Umunna said: "As the Public Accounts Committee has highlighted recently, there are real concerns over the way HMRC has reached settlements with some large firms, as well as the accountability and transparency of its decision-making.
"The committee said that HMRC has left itself open to suspicion that relationships with some companies are 'too cosy' and that small firms had not been given the same service as larger firms. These concerns must be addressed immediately to restore trust.
"It is crucial that HMRC act in a fair and proportionate way with both large and small firms, particularly given the pressures which many businesses are facing at present. It needs to work alongside small firms, most of which do not have a dedicated finance officer, in helping ensure they meet their tax obligations in full."
Small business praise... big business favours
Recently there has been a deluge of political rhetoric about the importance of small business, while the Revenue has been accused of letting the big boys off lightly...
"There are a range of bodies responsible for inspection (of small businesses). And they need to undergo this cultural change too. They need to understand their job is to make your life easier, not harder." - Nick Clegg, October 2011
"We want to make the UK the best place to start, finance and grow a business." - George Osborne, September 2011
* The Permanent Secretary of HMRC, David Hartnett, supervised and signed off a deal that saved Goldman Sachs around £10m in tax. The revelation only came to light after a whistle-blower exposed the "sweetheart" deal.
* Vodafone settled a long-running dispute with the revenue by paying £1.25bn, but a Commons committee heard allegations the tax bill should have been £6bn or more. The committee suspect there may be other questionable deals among £25bn of outstanding tax disputes.
* A review of the Pay as You Earn system for collecting tax concluded nearly six million people had been paying the wrong amount, with about 1.4 million facing demands for, on average, almost £1,500 each.
Case study: 'This is an extra burden I could really do without'
Daniel Price set up his personalised baby gifts company My1styears.com in 2010 from a tiny office that housed his small workforce as well as equipment. Six months later he expanded into a separate distribution centre in Mill Hill, north London
"This move by the tax man is very unfair on small firms because it's going to send the cost of doing business through the roof.
"We only have four directors and employ six staff and do everything we can to follow the tax office's rules, but this is just an extra burden that will be a lot more work for us. It will also take up more of our time, which is certainly going to be a hindrance to growth.
"There's more stress involved too – the ultimate fine might not be huge but it would affect our bottom line. We're providing jobs and paying tax to the UK economy at a time when everyone is struggling, but the government doesn't seem to appreciate that.
"Meanwhile big corporates like Goldman Sachs and Vodafone can spend money on avoiding tax. David Cameron spoke today about the UK seeing more start ups to boost growth – but that's difficult when we've got all these burdens imposed on us.