The taxman seems to treat firms differently according to their size

UHY Hacker Young has been compiling figures on the outcome of compliance investigations into small businesses’ VAT accounts

With the scale of corporate tax avoidance now so thoroughly exposed, the tax authorities are under ever more pressure to chase down every last penny that businesses owe. But has that led to HM Revenue & Customs treating small and medium-sized businesses unfairly while leaving the multinationals – including those companies that have made the headlines – to carry on as before?

That is the view of some tax specialists, who argue that their small business clients have been singled out as easy targets by HMRC because they don’t have the resources to fight their corner in the same way as the multinationals – or the option of shifting to a more comfortable tax jurisdiction if things get too hot here.

UHY Hacker Young has been compiling figures on the outcome of compliance investigations into small businesses’ VAT accounts. In the 2013-14 financial year, the extra VAT recouped following such investigations totalled £3.9bn, UHY Hacker Young says. That’s a record amount, and getting on for double the £2.2bn raised in this way just three years ago.

The small businesses targeted by HMRC range from financial advisers to sports clubs, but typically share one thing in common – they don’t have the financial firepower or legal knowhow to get into a protracted legal dispute with the taxman.

Even where such legal challenges are mounted, advisers accuse HMRC of a double standard. When the tax authority wins a case, it insists that the decision should set a precedent for all other similar cases, and seeks to operate that way. When it loses, however, it argues that no precedent has been set – companies in the same boat then have to pursue their own legal challenges.

Take the example of Lok’nStore, the self-storage business which took HMRC to court over the VAT it pays in relation to the percentage of its floor space that is used for storage. Lok’nStore won its case – netting a 99 per cent VAT saving – but HMRC subsequently refused to apply the judgment to its dealings with the rest of the self-storage industry, or in similar cases in other sectors.

The same outcome looks likely following the victory of Glasses Direct, the internet retailer, which took on HMRC when it argued that online sales of glasses were not accompanied by “medical dispensing services” – and thus not due preferential VAT treatment – even though sales of glasses in physical shops automatically qualify. Glasses Direct won its case, but the ruling does not appear to have been followed elsewhere.

“Unfortunately, the law is heavily weighted in HMRC’s favour,” complains Simon Newark, a partner at UHY Hacker Young. “Once it makes a decision, it is irrelevant if the decision is right, wrong or even unlawful – unless the taxpayer challenges it, the decision will be enforced by the full might of the state.”

In fact, the reality is even worse than that because large businesses in effect get to negotiate their tax bills. Several thousand of the biggest companies in the UK have their own customer relationship managers at HMRC, with whom they conduct ongoing discussions about their tax affairs and any disagreements about what they pay. By contrast, smaller businesses’ affairs are usually handled by their local tax office – not necessarily even consistently with the approach taken by offices elsewhere in the country.

It is, of course, only right that HMRC challenges small businesses that it believes aren’t paying their taxes – given the UK’s parlous fiscal position, every additional payment secured is vital. But there’s a difference between enforcing the rules strictly and bullying those businesses deemed likely to be a pushover. And that distinction is all the more pernicious if HMRC isn’t taking on the largest businesses at the same time.

Can it really be the case that small businesses underpaid VAT to the tune of £3.9bn last year, but only by £2.2bn three years ago? That hardly seems credible – unless, that is, HMRC has become far more aggressive in chasing down tax revenues.

Shares soar in legal wrangle firm

More strange goings-on at ARC Capital, the Chinese private equity fund listed on Aim which featured in Small Talk in August amid a dispute with ARC Capital Partners, then its investment manager. Out of the blue, ARC Capital’s share price has shot up 20 per cent amid rumours that its former investment manager was buying its shares.

The company says it has been unable to ascertain who is behind the “unusually high trading volume in its shares”. It fears the buyers may seek to scupper resolutions the board plans to put to its annual general meeting, aiming to make shareholders disclose their interests and require any acquiring more than 30 per cent of the company to make a formal offer for the business.

Meanwhile the legal dispute with ARC Capital Partners continues, with the Aim business claiming negligence and a breach of the investment management agreement.

Britain closes gap with Germany

Britain’s strong economic performance has seen it close the gap on European competitors on the number of high-growth businesses in the country. Research suggests the UK has more high-growth businesses (those that have increased the workforce by more than 10 per cent over the previous year) than any European country other than Germany.

The research, by the tax adviser Von Essen, suggests that the UK is home to 22,615 high-growth companies, while Germany has 32,252. The gap is smaller than it appears because the British businesses tend to be larger – they employ 2.57 million, not far behind Germany’s 2.68 million.

“More flexible labour practices in the UK make it easier for businesses to expand faster,” says Lydia Marref, a partner at Von Essen. “The UK also edges Germany in success in high-growth sectors, such as the IT and technology industries.”

Small Business Person of the Week: Michael Van Clarke, Hairdresser

“I set up my salon 26 years ago after working for John Frieda for 10 years. At the time, it was terrifying – I remember being physically sick twice in the week before we opened – but while I’d never imagined running my own business, I knew I couldn’t stay as I was. I found a place in Marylebone, which wasn’t a particularly expensive part of town in those days, and we got off to a good start because a number of my clients followed me over.

“Persistence has been the key – I’ve always had this innate desire for something better and I can’t imagine every wanting to retire; I still love what I do.

“There’s the salon, but we also have an education business, which works with our own apprentices and other salons, and also teaches salon management, and a hair products business.

“The products and education businesses were my way of developing the company. I wanted it to grow but I was also determined to keep control so that I could be certain about the quality we offered and that would have been more difficult with a chain of salons. I still work in our flagship salon most days – it helps that I live above it, literally above the shop.

“I run the business as a limited liability partnership – 90 per cent of our technicians and stylists are partners. I never wanted to be anyone’s boss and in any case these are the people who are the stars of our business, so a traditional employee-boss set-up never felt quite right.”