Research and analysis

Research to understand evasion in small businesses

Published 6 November 2025

Prepared by the National Centre of Social Research (NatCen) for HM Revenue and Customs 

Research report number: 851 

November, 2025

The views in this report are the author’s own and do not necessarily reflect those of HM Revenue and Customs 

Executive summary

This report sets out the findings from a qualitative research project conducted by the National Centre of Social Research on behalf of HMRC exploring small businesses’ suspected tax evasion behaviours.

In 2022 to 2023, the proportion of the tax gap attributed to small businesses was estimated at 60% or an estimated £23.9 billion, and it included the full range of non-compliant behaviours, from error to deliberate evasion. This share has grown steadily over the last 5 years. To address this, HMRC wished to gain a greater understanding of the attitudes and behaviours of small businesses who had recently been subject to a tax enquiry. 

Aims and methods 

The project used a qualitative approach, conducting in-depth interviews with small business owners who had been subject to a tax enquiry within the last 5 years. The project aimed to understand the attitudes of small business owners to tax evasion and the drivers for the behaviours that had led to their enquiry. The project also sought to understand whether enquiries led to changes in behaviour and what could prevent future enquiries.  

18 in-depth interviews were conducted with small businesses (nano, micro and small) or their financial representative in 2 waves between March 2024 and December 2024. During the interviews, hypothetical scenarios depicting common tax evasion behaviours were used to explore attitudes and potential motivations. Recruitment proved challenging due to the nature of the sample and the fact that small business owners are time poor, and it was particularly difficult to recruit nano businesses. The fact that the research concerned tax evasion likely also contributed to the difficulties of recruitment. As a result, there are limitations to the findings on deliberate tax evasion and the differences between businesses of different sizes.  

The businesses that took part in the research spanned several sectors including construction, hospitality, sales and manufacturing. They were based across the UK with a skew towards the South East. For the most part, nano and micro businesses relied on external accountants to submit returns to HMRC, with more basic record-keeping done in-house. In contrast, small businesses were more likely to have in-house finance or accounting teams with external accountants completing end of year returns or conducting audits.  

Attitudes of small businesses to common tax evasion behaviours  

The tax evasion behaviours depicted in the scenarios were generally understood to be wrong and illegal. However, there were a few factors that made business owners feel the behaviours were more acceptable or justifiable. These included if the amount of money involved was small and therefore likely to have little perceived consequence; if there was a blurred distinction between personal and business finances; if the behaviour was unintentional; or if the business owner was doing it to manage cash flow issues. These factors were also often the reasons that business owners felt that small businesses might engage in evasion. However, participants also recognised that the behaviours could be the result of a desire to pay less tax and of the opportunities that were available to small businesses to make that happen.  

What was driving the behaviours that led to enquiries? 

A wide range of behaviours had led to the enquiries of the businesses interviewed. While the focus of the research was on tax evasion, participants discussed different types of non-compliant behaviours interchangeably, which included deliberate and non-deliberate ones. Many of the enquiries concerned VAT, which could indicate that this is a particularly complex area for small businesses to get right. Most commonly, the drivers of these behaviours were lack of understanding or knowledge, human errors or grey areas. In these cases, participants were unaware that they had engaged in a risky behaviour. There were, however, examples of where awareness of the risk was higher. These related to cases where business circumstances changed or where participants chose to prioritise the potential financial gain. There was also a small number of cases where participants missed payments due to mental or physical health issues. 

Experiences of the enquiry process were shaped by whether participants were able to prove that the behaviour was unintentional and the impact on the business. Participants who had been able to identify the errors had a more positive experience and felt that HMRC had taken a collaborative approach to engaging with them. In contrast, business owners who did not understand how the issue had come about and who felt that their guilt was assumed by HMRC had more stressful and negative experiences. Where more significant sums of money were involved, this also contributed to greater stress as the survival of the business was potentially implicated. After enquiries it was common for small businesses to make changes to how they managed their taxes, by bolstering their capacity and capability within their finance team or through taking greater ownership of the finances and a more proactive role with their accountants and HMRC.  

Suggestions for preventing small business evasion 

There were a range of views as to whether participants felt their enquiry could have been prevented, with some feeling that they had been managing their taxes effectively and the enquiry was a one-off. Regardless, they suggested a range of ways wider small business evasion could be prevented. These centred on improved communication and guidance, as well as rules or processes. Suggestions included: 

• simplified regulations or clearer guidance from HMRC to help small businesses navigate the complex area of VAT

• more regular routine checks by HMRC to help small businesses learn about and quickly identify common errors, therefore reducing the consequences of enquiries.  

• framing communication around support and learning to help increase collaboration with HMRC

• having regular points of contact within a dedicated team focused on small businesses within HMRC to help small businesses have greater access to accurate information and build their confidence and relationship with HMRC

1. Introduction

This report presents the findings from a qualitative research project exploring tax evasion among small businesses. The project was conducted by the National Centre for Social Research (NatCen) with support from Walnut on behalf of HMRC. The project consisted of 18 in-depth interviews with small, micro and nano businesses who had recently had a tax enquiry ^{[footnote 1]} with HMRC. The research sought to understand the types of tax behaviours that lead to enquiries, the drivers of these behaviours and the attitudes of small businesses towards tax evasion.

1.1. Context for the research

Current estimates suggest that the UK’s tax gap stood at £39.8 billion for the financial year 2022 to 2023. The share of the tax gap attributed to small businesses has increased over the last 5 years, from 44% of the overall tax gap in 2018 to 2019, to 60% in 2022 to 2023, which is an estimated £23.9 billion ^{[footnote 2]}. This estimate includes tax avoidance and tax evasion behaviours. As a result, HMRC were interested in gaining a more detailed understanding of tax evasion behaviours among small businesses, their drivers, and the attitudes of small businesses towards evasion. They were also interested in understanding how this varied across small, micro and nano businesses.  

Previous qualitative research conducted in 2017 indicated that there are core attitudinal aspects and external factors that drive tax evasion behaviours in small and mid-size businesses ^{[footnote 3]}. Attitudinal influences included a sense of citizenship, distinction between personal and business assets, perceived risk, perceived financial imperative or reward and willingness to seek out or create opportunities to evade. External factors included social norms, media noise, market influences and agent use. Tax evasion was found to have been typically driven by a perceived financial need or reward, whether this be to stay in business, grow the business or enable a lifestyle that would otherwise be out of reach. Additionally, evasion was often associated with a blurring of boundaries between what belonged to the business and what belonged to the individual or their family. This was especially seen among smaller businesses who were more likely not to have clear financial boundaries between their business and personal or family life. 

Since this research was conducted, there have been several changes to the tax administration system, including the drive towards digitalisation as part of the Making Tax Digital programme, meaning that this evidence may be outdated. There is also limited research aimed directly at understanding the differences between small, micro and nano businesses. The current project aimed to address these evidence gaps.

1.1.1. Research questions 

The core objectives of this research were to: 

• develop an understanding of the perceptions, behaviours and attitudes of small businesses who were recently subject to an enquiry

• generate qualitative data on the key drivers of evasion among these businesses

• assess whether there was a difference in perceptions, opinions and themes discussed between small, micro and nano businesses

To achieve these objectives, the research aimed to answer the following research questions: 

1. What are the business demographics of the businesses taking part and how do these impact their propensity for evasive behaviours, if at all? 

2. To what extent and in which scenarios did these businesses utilise a tax agent or other intermediary? 

3. What was the nature and scale of the behaviours they had taken that were related to tax evasion?  

4. What, from their perspective, were the key reasons for engaging in tax evasion? 

5. What were their attitudes generally towards tax evasion? 

6. What were the differences in answers to research questions 2, 3, 4 and 5 between small, micro and nano businesses?

1.2. Methods 

This section sets out the main methods used and a description of the achieved sample. It also briefly outlines the recruitment approach and challenges encountered.

1.2.1.  Sampling and recruitment 

The sample was drawn from HMRC records of small businesses that had been subject to an HMRC enquiry in the last 5 years which had led to a tax yield of over £1,000 and whose case had been closed by HMRC by the time of conducting the fieldwork. These cases had been flagged by HMRC case workers as cases of evasion. Potential participants were initially sent a letter from HMRC with information about the research and given a chance to opt out of the research. The sample, excluding those who opted out, was then transferred to NatCen for recruitment.  

The research used a purposive sampling approach to select participants based on characteristics expected to affect experiences. Quotas were set on the size of the business and whether they used a tax intermediary, to ensure different populations were represented in the sample (see Table 1). For the purposes of this project, the sizes of the businesses were defined as: 

• nano business: Incorporated CT; Partnership ITSA; ITSA & Registered for VAT; no employees; turnover between £0 to £85,000

• micro business: All tax regimes; 1 to 9 employees; turnover between £85,000 to £2 million

• small business: All tax regimes; 10 to 19 employees; turnover between £2 to £10 million

NatCen’s Telephone Unit made recruitment calls which aimed to: 1. identify the right person to speak to 2. inform them about the research 3. ask a series of short screening questions before booking them for interviews.

Interviews were conducted with people who were involved in some or all key decisions relating to tax and financial matters within their business and who had knowledge of the business’ recent enquiry. The full achieved sample can be found in appendix A.

Table 1.1: Achieved sample with demographic information on the size of the business

Size	Achieved interviews
Small	7
Micro	8
Nano	3

Table 1.2: Achieved sample with demographic information on tax agent use

Tax agent use	Achieved interviews
Yes	11
No	7

Challenges with recruitment

Due to difficulties with recruitment, fieldwork took place in 2 waves. In the first wave, HMRC provided a sample of around 400 businesses, from which 4 interviews were completed. A second larger sample, containing more recent contact details was thus drawn, of around 3500 businesses, leading to an additional 14 interviews completed.  

The project encountered challenges both with recruiting participants to take part in the research and with completing the interviews. Almost half of the interviews booked (44%) did not take place. It was clear that the topic of the research, as well as perceptions of HMRC, impacted people’s willingness to take part. Challenges with recruitment were the result of several factors: 

Issues with the sample

Many phone numbers were not in operation or did not get answer. Where phone calls were answered, the recruitment team encountered difficulties in identifying and reaching an individual with knowledge of the enquiry. Many of the numbers on record were also for accountants who claimed they no longer worked for the business.

Nature of target population

Many of the businesses contacted were no longer in operation or individuals were not able to spare the time to take part in the interview. This is linked to the nature of the population, with small business owners being notoriously time poor and many small businesses closing within a few years of being established.   

Concerns about the research

In some cases, potential participants were suspicious if they had not seen a letter, or chose not to take part as they did not see the value of the research because they did not think their input would change HMRC. 

Capacity to participate

Although the enquiries took place within the last few years, some businesses felt they did not have a good enough recollection to take part. In a few instances, participants could not take part due to language barriers. 

To encourage participation, participants were given reassurances of anonymity and confidentiality, offered interview slots of 30 minutes rather than 45 minutes, as well as evening and weekend slots. In a small number of cases, the option of a written interview was offered. The importance of the research in ensuring HMRC was better able to support small businesses was also emphasised.

1.2.2. Fieldwork and analysis 

Interviews were carried out in 2 waves. The first wave was conducted between March 2024 and April 2024, and the second wave between October 2024 and December 2024. Each interview lasted between 30 and 45 minutes and was carried out via telephone or Microsoft Teams, depending on participant preference. Interviews were audio recorded with the participant’s consent and transcribed. One written interview was conducted over email. As a thank you for taking part, NatCen made a £80 charity donation on the participants’ behalf to a charity of their choice.  

A detailed topic guide was used to guide the conversation and ensure consistency across interviews, covering: 

• the context of the business, including the role of the participant and how they manage their finances and taxes

• details of their business’s prior HMRC enquiry, including circumstances and actions taken

• suggestions for what could have prevented their business being subject to an HMRC enquiry and support that could be offered

In addition, in each interview, 2 hypothetical scenarios (see 3.1) were presented to participants and discussed. These scenarios were designed by HMRC to reflect common types of evasion behaviours seen in small businesses.  

While those recruited for the study had a case that was flagged as evasion by HMRC,  participants may have not been aware that it was flagged as such, or they may have disagreed with HMRC’s classification. As a result of this, the word ‘evasion’ was not explicitly used in discussing their enquiry, unless mentioned by the participants first. Interviewers followed the lead and language of the participant in describing the behaviour in question throughout the interview. 

NatCen’s Framework approach ^{[footnote 4]} was used to summarise the rich qualitative data on a cross-sectional case and theme basis. Findings from each interview were summarised under key themes related to the study aims and research questions. This enabled the researchers to identify insights about how participant views, perceptions and behaviours varied across key characteristics.

1.3. Limitations 

This report does not provide numerical findings, as qualitative research does not support statistical analysis. Instead, it seeks to provide rich insights into the range and diversity of experiences among research participants. However, due to the nature of the topic area and the challenges encountered with recruitment, there were limitations to the diversity of the sample achieved.  

The insights are particularly limited with respect to nano businesses, where recruitment proved especially challenging. It is also likely that the research did not adequately capture the range and diversity of views of small businesses who knowingly engaged in evasive behaviours.    

Similarly, the use of scenarios in interviews has its limitations. Participants were asked openly about their immediate thoughts on the scenarios, whether the behaviour was wrong, and whether there were any risks in engaging in the behaviour. Although reassurances were given that the scenarios are fictional, nonetheless participants may have felt a pressure to respond in a certain way. 

1.4. Report structure 

This report is divided into the following chapters: 

• chapter 2 briefly outlines the demographics of the businesses that took part in the research, such as the sector, the age of the business and how they manage their finances

• chapter 3 sets out the findings in response to the scenarios:
  • it outlines general attitudes to evasion, the factors that shape them and views on potential motivations for evasion
  • it also discusses perceptions on the relationship between HMRC and small businesses

• chapter 4 explores the experiences of the HMRC enquiry, including the factors that led to evasion and the impact of the enquiry on small businesses

• chapter 5 outlines the prevention suggestions discussed by participants and how they would stop small businesses from engaging in tax evasion

• chapter 6 concludes with a discussion of the implications of the research for HMRC

2. Business demographics

This chapter sets out the types of businesses and participants that took part in the research and discusses the different approaches businesses took to managing their finances and taxes. 

2.1. Age, sector and region of businesses 

A wide range of types of businesses took part in the research from several different sectors. Sectors represented in the sample included: construction, manufacturing or sales of specialist equipment, hospitality, leisure and professional services such as IT or communications. 

Businesses were based across the UK, including in Scotland and Northern Ireland, although higher numbers were located in the South East. The businesses in the sample were also diverse in terms of the length of time they had been established. The sample divided roughly equally between businesses who had been established prior to 2000, those established between 2001 and 2019 and those established in 2020 or later (see appendix A).  

2.2. Use of tax agents and approach to managing finances 

Across the sample there was widespread use of external accountants or tax agents. However, the role that these individuals or companies played varied depending on the size of the business.  

Among micro and nano businesses, much of the daily financial management was outsourced. External accountants tended to be used by these businesses for all matters relating to HMRC. Some day-to-day functions, such as payroll, were also outsourced to these organisations. Basic bookkeeping or record keeping tended to be done internally but without a specialist role or by someone without any specialist training. The exception to this was one participant who described doing all their own returns with the help of a family member who was a trained accountant. Participants described simply keeping records and sending them to their accountants, indicating little knowledge of the process and a high degree of trust in what they were doing. 

“Everything HMRC related and everything tax related is going to there [the accountants]. I’m just sending them all the information”. (micro business, construction and manufacturing)

In contrast, although small businesses also described widespread use of external accountants, it was clear that more financial management was done internally within these organisations. In these businesses, it was more common for an employee to be completing HMRC returns and submissions, such as VAT returns. External accountants were mostly used for completing annual accounts, conducting annual audits and sometimes for doing quarterly checks. This was described as follows, 

“[the accountants’ service is] really just an external checking mechanism that we use and they would just do spot checks to make sure that the business is fulfilling all its requirements.” (small business, construction and manufacturing) 

Participants from small businesses also described accessing specialist external advice on tax matters. 

This difference in approach (which linked to business size) was also reflected in who took part in the research on behalf of the business. For small businesses, the participants tended to be in-house accountants, finance managers, or bookkeepers. In contrast, in the case of micro and nano businesses, the participants were usually (co-)founders and directors of the business. While ultimately responsible for all matters related to HMRC, they may not have had much direct involvement in the enquiry beyond providing documents to their accountants.

3. Attitudes to evasion

This chapter outlines general attitudes to evasion among the small businesses interviewed based on the 4 hypothetical tax scenarios presented during the interviews. The chapter begins by discussing responses to the scenarios and the factors that shape them, before looking at their views on the potential motivations behind the behaviours depicted. It ends with a discussion of participants’ pre-existing perceptions on the relationship between HMRC and small businesses.  

The 4 hypothetical tax scenarios were developed with HMRC to reflect common behaviours seen among small businesses. Each participant was asked to discuss 2 of the 4 scenarios during the interview, selected at random.

3.1. Tax scenarios 

Scenario 1: Spending cash before it is recorded 

Tabitha sells lunch to employees of local businesses in her food van. Each week, she does a weekly shop for the business. Sometimes, before cashing up at the end of the day, she will use cash taken that day to pay for extra stock or fuel for the van. 

Scenario 2: Not declaring all cash income 

Emmanuel runs a small deli in the local village. The majority of customers pay by card, but a few customers have a preference to pay with cash. On some of these occasions, he does not declare the income taken in cash. 

Scenario 3: Over-claiming business expenses 

Dhanisha runs an IT consultancy business out of her home office. One day she is talking with her tax agent about the business when she mentions her daughter’s iPad has broken and she’s going to have to buy a new one. The tax agent suggests she could put that down as a business expense, since it’s a viable piece of technology she could use in her business. Dhanisha follows this suggestion. 

Scenario 4: Understating employee earnings 

Cheryl owns a café and a food truck. For the last few months, her niece has been helping out in the café on Saturdays and Sundays to earn some money. Since her niece is only working a few hours each day, Cheryl decided not to put her through PAYE and just pays her cash-in-hand.

3.2. Attitudes to evasion 

The evasion behaviours described in the scenarios were generally perceived as common, with the scenario of a business expense being claimed as a personal one considered particularly common. 

However, some participants were reluctant to speculate on how common the behaviours were, arguing that the behaviour in question would not happen in their business because they had the right processes in place to prevent it. This could have also been a result of lack of familiarity with the sector depicted (for example, the catering industry), as the businesses interviewed tended not to process cash transactions. 

3.2.1. Factors that shape attitudes to tax evasion 

The tax evasion behaviours exemplified in the scenarios were perceived as wrong and potentially illegal across the sample. However, participants did not always see them as ‘typical tax evasion’, and views on their acceptability depended on 4 factors outlined below. 

Intention 

Where the evasion behaviour was perceived to originate from lack of knowledge or naivety, participants were more likely to be understanding of it. 

“People don’t know the full rules and might get stuck into something accidentally, without knowledge.” (micro business, construction and manufacturing) 

Behaviours that were likely to be caused by lack of awareness of tax rules were perceived by participants as distinct from engaging in tax evasion intentionally. This is exemplified through the scenario where a tax agent advised a small business owner to claim a personal expense as a business one. One participant argued that the behaviour of the tax advisor, who should know that what they were advising was illegal, was ‘morally distinctive’ from that of the business owner, who was unlikely to be aware of it. 

A distinction was also sometimes drawn between small business evasion and ‘corporate fraud’, which participants perceived as less justifiable. This was because bigger businesses were seen as having the right procedures and resources in place to avoid unintentional evasion. 

Consequences 

Generally, participants tended to be more understanding towards a behaviour if it was perceived not to lead to significant financial consequences for either the business or HMRC. When discussing potential risks, participants sometimes focused on describing risks related to the businesses’ finances. Reacting to the scenario in which a food van employee used cash earned to buy new stock before cashing up, a participant argued that it posed a liquidity risk because the employee used capital without setting any aside, but they believed that this type of risk was unavoidable for small businesses. Regarding the scenario where a small business owner employed their niece and decided not to put them through PAYE, one participant argued that there were no risks with this behaviour. They explained that this was because the niece was unlikely to earn above the tax threshold, and, as a result, the outcome for the business was going to be the same regardless. In contrast, one participant pointed out the wider legal risks involved: 

“it isn’t right […]. If you give license to allow people to do that, then the other side of it is you’re giving the opportunity to more unscrupulous people not to pay minimum wage, not to make sure that the employee has the proper protection and the proper employment rights and all of that.” (small business, construction and manufacturing) 

This suggests that some small businesses might perceive it as acceptable not to abide by tax regulations if they believed that the matter was solely related to paperwork and was unlikely to have other consequences. Similarly, it shows that in some cases, business owners could think about the priorities of their business first before considering legal risks. 

Participants also tended to be more understanding towards a behaviour if it did not lead to significant financial consequences for HMRC. In the scenario involving the food van business owner, a participant claimed this was not ‘malicious’ even though the behaviour was against the law. Ultimately it was felt to depend on the amount involved. 

There was also a perception that small business evasion had less of an impact than evasion in large businesses. This was because participants believed that the tax gap caused by small business evasion was smaller than the one caused by bigger businesses, which they described as ‘large-scale corporate fraud’. There was a view that small businesses are trying to survive while being the ‘engine of the economy’, in contrast to bigger businesses, that try to minimise their tax, with Amazon given as the example. Therefore, some believed that HMRC should focus on addressing evasion in large businesses instead. 

Blurring of personal and business finances 

Where the distinction between personal and business finances was blurred, participants were more likely to justify the behaviours described. The scenario in which a family member was employed without being on PAYE was perceived by some as harmless and understandable. This was particularly if the amount they were earning was unlikely to reach the tax threshold.  

“Family looking after their family. […] I don’t see that as being a major issue as long as it stays below the working threshold.” (micro business, construction and manufacturing) 

Some found it more difficult to grapple with the blurred distinction between personal and business aspects. Even though one participant knew that the behaviour was illegal, they struggled to determine whether it was justifiable or not. 

“It’s difficult because, yes, it’s almost like paying your kids pocket money, isn’t it, in a way? You’ll pay your kids pocket money to do some little jobs around the house. That’s absolutely fine, isn’t it? […] You’re teaching them about money and you’re giving them money and independence. It’s almost like that. It’s kind of one step removed from that” (small business, construction and manufacturing) 

Similarly, the scenario where a personal expense was claimed as a business one was likely to be perceived as wrong, but not always illegal. One participant mentioned that if this behaviour was illegal, then directors’ allowances would also be illegal. 

Issues with cash flow 

There was an assumption among participants that small businesses were struggling to survive and were dealing with cash flow issues. Evasion behaviours were seen as more acceptable if they were motivated by a lack of cash flow. One participant mentioned that small businesses sometimes did not have a choice but to evade, and that this was sometimes better for the business. There was a view that paying taxes could hinder small businesses who are struggling to grow or survive. 

“It’s difficult for them [small businesses] to make profit at the moment because of inflation. If they pay everything as normal as per the tax rules, the money they make will not be sufficient for them to live.” (micro business, retail, accommodation, and entertainment)

3.2.2. Reasons for tax evasion 

The reasons for engaging in tax evasion behaviours, as perceived by the participants, largely mirrored the factors that shaped their acceptability.

Lack of knowledge or understanding of tax rules

Small businesses were perceived as lacking the necessary expertise to manage their taxes effectively, which could lead to unintentional mistakes. This was particularly in the case of nano businesses, where employees might find themselves doing jobs outside of their skillset as the business lacks the necessary financial resources to employ a tax agent. 

“Sole traders or very small businesses are trying to multitask (…) They are experts in their field, but they’re not experts in my field [accounting]” (small business, construction and manufacturing) 

This can be exacerbated by the fact employees in small businesses tend to be very busy, and their limited time prevents them from educating themselves on tax regulations. Additionally, tax rules are sometimes perceived as complex or unclear, and they are written in a language deemed as ‘difficult to consume’ by those without a specialised background. 

“It’s [accounting] in another language as well, as far as that’s concerned. It’s in financial language as opposed to the day-by-day language that you and I use.” (micro business, construction and manufacturing) 

Consequences

There was a view that being unlikely to face consequences might motivate small businesses to engage in tax evasion behaviours. The scenario in which a personal expense was claimed as a business expense exemplified this. While recognising this was wrong, participants speculated that business owners might perceive low risks associated with this behaviour, because it would be difficult for HMRC to prove that the purchase in question was not related to the business. 

Blurring of personal and business finances

Participants believed that small business owners might see the business income as their own or feel entitled to it, particularly if it is linked to their own account. 

“They’re a bit closer to the income, aren’t they? If it’s a very small business, the income is directly into your account, really. […] It’s easier to see it as your own money rather than as company money.” (small business, construction and manufacturing) 

Similarly, this blurred distinction could motivate them to involve family members in the business, such as by employing them without having the necessary documentation in place.  

Issues with cash flow

Small businesses could be dealing with financial pressures caused by inflation and the cost of living. Participants believe that this could force them into tax evading behaviours. 

In addition to these, participants identified 2 other potential motivations. 

Opportunities for tax evasion 

There was a view that small businesses have different opportunities for tax evasion compared to bigger businesses. Lack of procedure within the business was seen as a cause for tax evasion, as it could lead to more mistakes being made. Similarly, participants believed that working with cash could affect the traceability of transactions, making it easier for some to be concealed, as opposed to businesses that conduct their transactions digitally. 

Due to having different levels of resources, one participant claimed that small businesses had more opportunities to commit tax evasion involving small amounts, whereas big businesses committed large-scale tax avoidance, which can be legal. 

“Larger businesses can have tax avoidance schemes. […] A small business can’t do that, but they will evade paying tax. […] It’s small amounts, but they have that opportunity by doing by little things.” (small business, construction and manufacturing) 

Wanting to pay less tax 

Another view was that businesses could be motivated by a desire to minimise the taxes they pay. However, this was not always seen as something specific to small businesses. Participants mentioned seeing advice on how to minimise taxes on social media, pointing to wider societal attitudes towards tax. They believed that tax advisors could also give small businesses such advice, creating the view that wanting to pay less tax is acceptable. 

“I can see a lot of people trying to minimise the tax that they have to pay by probably finding different ways legal or illegal ways. (…) You can see it everywhere on LinkedIn and things like that, how to minimise paying taxes.”  (micro business, construction and manufacturing)

3.3. Views on the relationship between small businesses and HMRC 

Views on the relationship between HMRC and small businesses identified both positive and negative aspects.  

3.3.1. Positive aspects 

Regular updates.

Participants appreciated HMRC’s efforts to stay in touch with them and keep them updated on tax regulations. Tax newsletters, webinars, courses, and specialised advice for certain industries were all examples given of positive communication.  

Providing support.

Some participants mentioned the contrast between the wider perception of HMRC as ‘scary’ and their experience of previous interactions with them. Although it was generally felt to be difficult to reach HMRC on the phone, once in contact some participants had positive experiences with employees being helpful, polite, and able to provide the necessary information.  

3.3.2. Negative aspects 

Lack of direct communication

Generally, difficulties in reaching out to HMRC were reported. This was mostly exemplified by long waiting times when calling them. Although participants appreciated the helpline, they commented that in practice it takes a long time to get through to someone. There was a wider feeling that HMRC neglects small businesses, compared to bigger businesses that tend to have Customer Compliance Managers (CCMs). In the absence of a direct point of contact they can seek advice from, small business owners’ questions sometimes remain unanswered. Some reported preferring to take a risk, as if they turned out to have made an error, paying the fine would be cheaper than paying for professional tax advice. The lack of direct contact or ability to get in touch with an employee made HMRC seem like a ‘a faceless machine’ that only communicates by letter.  

Perception that HMRC tries to ‘catch people out’

There was a widespread perception that HMRC inspectors were incentivised to find mistakes. This made some business owners feel that regardless of how hard they tried to abide by the rules, HMRC would ‘always find something’ they did wrong. Participants described feeling stressed about HMRC inspections: 

“We dreaded the HMRC visits, the VAT inspections, because it felt like they weren’t there to help you do the best job. They were there just to find something wrong and go back with a, ‘Oh, look, I found a mistake. Tick. I’ve done my job properly.’” (small business, construction and manufacturing) 

Finally, there was a group of participants who did not think they had a relationship with HMRC, either because they communicated with them through the accountants, or because they did not think they needed to have one, as they perceived it as their business’ responsibility to abide by tax laws.

4. HMRC enquiry 

This chapter sets out detailed findings related to the enquiries the businesses were subject to. It begins by outlining the types of behaviours that led to enquiries and the reasons behind them, before moving on to experiences of the enquiry and the factors that shape them. It ends by discussing the impact of the enquiry on small businesses, including any changes in behaviour. 

4.1. Behaviours that led to enquiries 

The behaviours in the sample were most commonly identified as part of routine or more targeted inspections carried out by HMRC. However, in a small number of cases, the businesses identified issues and flagged them to HMRC themselves. While the focus of the research was on tax evasion, participants discussed different types of non-compliant behaviours interchangeably, which included deliberate and non-deliberate ones. 

Generally, the behaviours were related to VAT. Participants described this as a particularly complex area that requires extensive documentation. This was especially the case for export businesses that had to grapple with the change in requirements post-Brexit. The types of behaviours that led to enquires included: 

Incorrect VAT returns or claims

Mistakes in the amount of VAT paid or claimed back appeared to be a common reason for enquiries. These mistakes were in both directions, so both amounts that the business owed and that HMRC owed them. The issues arose from poor performance from accountants, errors in calculations related to specific expenses (for example, vehicle tax), using the wrong VAT code or wrongly claiming VAT on certain purchases (for example, insurance).  

Being on the wrong VAT scheme

Where turnover had recently increased, businesses could find themselves on the wrong VAT scheme. In one case, the business notified HMRC of this situation during a tax audit.  

Missed payments

Being late making payments, such as those related to VAT or corporation tax, also led to enquiries. In one case, this was due to using the payment money to set up other business ventures, which caused a lack of cash flow. Payments were also missed due to accountants or business owners being off work for health reasons. 

Lack of adequate documentation

In some instances, a lack of required documentation for VAT, such as a missing invoice, triggered the enquiry.  

Fraud

In an outlier case, the finance advisor proposed a fraudulent method of paying less tax. This involved setting up other businesses, investing in them, and getting paid dividends from those companies. Following this, they would close the companies reporting a loss. 

It was not always possible to determine the behaviours that led to the enquiry, as some businesses were not explicit or not clear regarding the nature of the issue. In addition, some businesses reported that the enquiry had come about due to an error on HMRC’s part, which was not possible to verify during the course of the interview. 

4.2. Drivers of the behaviours that led to enquiries 

The drivers behind the behaviours that led to  enquiries fell on a spectrum, as shown in Figure 1. On one end, behaviours were driven by factors that meant participants were unaware of the risk and the behaviour was unintentional. This was the case where the behaviour was driven by grey areas and disagreements, a lack of knowledge, or human errors. On the other end, participants had a greater awareness of the risk involved where the driver of the behaviour was a change in business circumstances or the prioritisation of financial gain over tax regulations. Falling somewhere in the middle, was when the behaviour was driven by health issues. While in these cases, the behaviour was not intentional, participants may have had some awareness of the fact that they were falling behind on payments.

Grey areas and disagreements 

Grey areas could lead to enquiries and potential disagreements between small businesses and HMRC. In these instances, businesses either challenged the decision in court or opted to pay what was required, as described by a participant in the case below.

Case illustration 4.1: Disagreement over claiming VAT on professional fees (small business, retail, accommodation and entertainment).

HMRC identified a few professional fees that the business had claimed VAT on and argued that this was wrong. The business did not perceive this as evasion because their tax advisors advised them that it was correct. The HMRC inspectors were unable to decide the matter definitively on the day of the visit and they had to consult further internally. They then contacted the business again after 6 months and informed them that they were in the wrong and they needed to pay back what they owed HMRC. Although the business disagreed with the decision, they decided it was more cost-efficient to pay the amount back than to challenge it in court, particularly as the final amount was low.

Lack of knowledge or human error 

Lack of knowledge was a key driver of behaviours that led to enquiries. Participants explained that mistakes were often caused by lack of expertise or understanding of tax rules. This was particularly the case of small businesses that did not employ someone with enough expertise in tax, or they did so too late. In one case, this led to systematic mistakes in VAT claims and returns: 

“People are doing things outside their skillset when they’re running a very small business, and as that business grows, they’re maybe being stretched and… The point where they bring in a specialist for different tasks can sometimes perhaps be a little bit later than was absolutely necessary, and I think that was probably the case.” (small business, construction and manufacturing) 

Similarly, one nano business owner described relying on their father, who was retired, for tax advice. This meant that they followed advice that was not up to date with tax regulations, leading to the enquiry.  

In other cases, participants described enquiries as being caused by ‘human error’. There was an assumption among participants that these errors were unavoidable, even in cases where the business worked with an accountant. The amounts associated with these enquiries were generally low and they did not impact the businesses in a significant way. In one example, the accountants and the tax management software both missed a rule change. 

“There’s a lot of rules and this one had slipped through. I don’t think the VAT rules are too complicated for an accountant, but if they missed one and hadn’t quite applied it, then yes, this stuff happens.” (small business, construction and manufacturing) 

Mental or physical health issues 

Mental or physical health issues on the part of either the business owner or external accountant could also drive behaviours, particularly where payments were missed. These included unexpected illness, and stress caused by working multiple jobs at once. 

Changes in business circumstances 

Suspected tax evasion behaviours were also caused by recent changes in business circumstance. For example, in one instance, a sustained increase in business turnover led to different VAT requirements. This meant that the business had to change the VAT scheme they were on. 

“We were always on the right scheme; it was just it was a bit of a surge in the order book, so if you go above it and you come below again, you can stay on that scheme if it’s just a one-off. But because we stayed above it, then we hadn’t changed schemes, so even if the HMRC hadn’t have come out, we were already aware that we would have to change schemes.” (small business, construction and manufacturing) 

Prioritisation of financial gain over tax regulations 

There were cases within the sample of participants who were aware of the risk associated with their behaviours, but they decided to ignore it, prioritising the financial success of their business instead. In one case, a business owner missed payments due to using the funds to set up other businesses that ended up being unsuccessful. This led to a lack of cash flow, which meant that they were not able make the payments on time. Although they initially claimed that this was due to lack of understanding of tax regulations, they later admitted that their accountant had flagged the missed payments. The participant justified this behaviour by stating that business is all about taking calculated risks, but in this case, things did not go the way they planned. 

Similarly, in another case, the participant followed advice on how to minimise tax from their finance advisor. They mentioned feeling sceptical about the advice at the beginning, stating that it sounded too good to be true, but they ended up ignoring this feeling and prioritising financial gain. Later, they found out that the finance advisor had a history of evasion in previous companies. 

“They said to me that it was compliant with the letter of the law, but not the spirit of the law. […] my greed kicked in and I went, ‘Yes, okay, fine.’” (micro business, information and communication)

4.3. Experiences of the enquiry

Experiences of the enquiry were generally described as stressful, and they were shaped by 3 factors: whether the participant was able to prove their behaviour was unintentional; the impact on the business; and the length of the enquiry. More positive experiences occurred where participants were able to prove the behaviour was unintentional and the amount of money involved was low. More negative experiences occurred where participants felt that they were treated as ‘guilty until proven innocent’ and the amount involved was more significant.  

The length of the enquiry and its uncertainty affected both those with more positive and negative experiences, either creating or exacerbating feelings of stress and worry. Most participants reported that the process of closing the enquiry was long, taking around 6 months.  

4.3.1. Positive experiences 

Small businesses that were either already aware of what was wrong or were able to identify the mistakes on their own and point them out to HMRC had a less stressful experience of the enquiry. These businesses described their interactions with HMRC in more positive terms. Where participants were able to identify the errors on their own, they shared the necessary documentation with HMRC, such as spreadsheets and invoices, pointing out where mistakes have been made.  

Participants also experienced less stress when they knew that they were managing their taxes effectively and they were confident that they had done nothing wrong on purpose. 

“It was completely fine. […] Because I know we’re not doing anything wrong. If there’s a rule that I’m not aware of, I’d be quite happy to find out about it. There was absolutely no intention to avoid any tax or play any games, so I was not at all worried about it.” (small business, construction and manufacturing) 

Those with positive experiences described the approach of the HMRC inspectors who handled their cases as empathetic and collaborative. Likewise, participants reported that where HMRC understood that the behaviour was not intentional, or where the enquiry concerned a ‘grey area’, they were offered more support, such as deferred penalties or payment plans.

Case illustration 4.3.1: Positive experience (small business, construction and manufacturing)

The accountant had been in the business for a few months when HMRC notified her that they would carry out an inspection. Because they were going to audit work that was not hers, she asked them for additional time to prepare. The accountant then carried out an internal audit and found multiple mistakes made by the previous employee in charge of finances (who had not been an accountant). She explained to HMRC that she was new to the business and the mistakes would not happen again. She also shared the spreadsheets with them, marking up all the errors and the total value of the mistakes. The participant described that the HMRC inspector was very helpful, and she believed this was because he understood that there was no intention to defraud. For the same reason, HMRC agreed to defer the penalties.

“I felt like the man I dealt with; he was helpful, and he listened, and he appreciated what I was doing. […] I felt they dealt with us very fairly because there were a lot of mistakes in our - in the submissions. None of it was intention to defraud. It was all genuine error. I think I was able to prove that, so maybe that was why they dealt with us so fairly.”

4.3.2. Negative experiences 

In contrast, participants who were not able to prove that the behaviour was unintentional had a more stressful experience. This was particularly if they were unaware of the mistakes and were not able to identify them. The impact of the enquiry on the business also created feelings of worry, for example in cases where the amount involved was high or where the business could not submit VAT returns. This was intensified by the length of the enquiry, which led to uncertainty. 

During the enquiry, participants felt pressured by HMRC. This was described as receiving ‘threats’ in the form of multiple letters, phone calls, or home visits from HMRC officers. They felt that the tone of the communication assumed that they had done something wrong on purpose, and that they were treated as ‘guilty until proven innocent’. One participant described they felt as if multiple tax officers were ‘screaming and shouting’ at them regarding the money they owed. 

A recurring experience across the sample was struggling to get in touch with HMRC during the enquiry. This was described as long telephone waiting times or unanswered calls. The communication with HMRC also felt ‘disjointed’ to some, as speaking to someone with knowledge of their case was difficult and they often had to repeat themselves when speaking to different staff members on the phone

Case illustration 4.3.2: Negative experience (micro business, construction and manufacturing)

The business owner recounted that the enquiry came ‘out of the blue’ when HMRC demanded to see all their tax information. He understood from the HMRC communication that the business had done something wrong, but he did not know what. As a result, he felt very worried during the enquiry, which went on for 6 months. He felt that he was treated as guilty until proven innocent rather than the other way around. The accountants eventually figured out that they had been miscoding VAT for some transactions and owed HMRC £150, which they paid back with interest. They were only given a warning because HMRC acknowledged that they were cooperative during the enquiry process.

“Having sleepless nights really trying to get our heads together about what could we have done, how could we have done it, what they’re looking for now […] I just felt that they could have done an awful lot better, instead of trying to think that we were the ones who were trying to defraud.

4.4. Impact of the enquiry 

It was common for participants to report having changed some element of their handling of their tax affairs following the enquiry, regardless of whether they had a positive or negative experiences. Changes in behaviour include: 

Increasing the capacity and capability of the finance team

Across the sample, a common response to the enquiry was to increase the capacity or capability within the finance team. What this looked like in practice varied depending on the size of the business. For small businesses, it involved increasing the size of their internal finance team to ensure that the business had enough employees to double-check the work. For micro businesses, this included hiring new finance managers or accountants or deciding to work more closely with external accountants, who previously only handled specific aspects of tax management. They also started carrying out quarterly rather than yearly audits to make sure that no mistakes are missed and to ensure that the accountants held responsibility if something went wrong. Nano businesses started working with a bookkeeper for the first time. 

Taking a more active role

Business owners who had been less involved in and aware of how their taxes were managed (particularly when outsourced to an external accountant), began to take a more active role. One participant described realising that they were responsible for their taxes and deciding to take more ownership to make sure that no mistakes will be made in the future. Whereas previously, their accountant had full responsibility for managing the finances, following the enquiry, the participant was more involved and spoke on the phone regularly with the accountant. A more active and careful approach was also characterised by being more proactive in communicating with HMRC and reporting potential mistakes immediately. 

Some participants did not change their behaviour following the enquiry because they felt it was a one-off situation, or they felt they were already doing everything they could to manage their taxes effectively. In these cases, participants did not feel the need to improve their financial processes.

5. Prevention suggestions

This chapter outlines the prevention suggestions discussed by participants and how they would stop small businesses from engaging in tax evasion. 

Some participants felt that their enquiries could not have been prevented. This was the case when they felt that they were already doing everything they could to manage their finances effectively and the enquiry was seen as a one-off rather than a systemic issue, as well as where a participant saw an opportunity to grow the business and chose not to pay. However, most of them described a few ways in which future enquiries could be prevented for small businesses as summarised in Figure 2.

5.1. Communications and guidance 

Point of contact with HMRC 

As small businesses sometimes lack tax expertise, participants suggested that having a dedicated point of contact could increase their confidence and help prevent future mistakes. One participant highlighted that this could offer a more trustworthy source of information, as accountants could try to advise their clients on how to minimise their taxes. 

“if you need something answering from a tax point of view, you go to your accountant […] and the first thing your accountant is thinking is, how can I minimise the tax bill? Well, that might not be what I want to do as a citizen of the UK. I might want to pay the full tax that’s due […] but if I go to an accountant, the accountant is going to charge me money. What the accountant is thinking is, I’ve got to save him some money to justify my fee.” (micro business, retail, accommodation, and entertainment) 

Similarly, reducing the waiting time on the HMRC helpline could ensure that small businesses could use it more effectively. Additionally, there was a view that HMRC relies on letters for communication, which could cause delays. Some participants expressed a wish for HMRC to communicate via emails instead, as this would be more time-efficient. 

Increasing collaboration with HMRC 

Participants mentioned that the communication they received from HMRC made them feel pressured due to the assumption that they did something illegal on purpose. This could feed into the wider perception that HMRC is unapproachable or that they are incentivised to find mistakes, rather than to support small businesses. 

To promote collaboration with small businesses and reduce the stress caused by enquiries, HMRC could aim to support small businesses by adjusting the tone of their communications where a behaviour was not done on purpose. 

“Business owners are scared of HMRC. They know what HMRC can do to them, and I personally think that what HMRC could do is […] heavily promote the personal side of things where they can help businesses. They are not there to close businesses down. They’re there to collect dues and will help the small businesses.” (micro business, retail, accommodation, and entertainment) 

Confirming the legitimacy of HMRC communication 

Some participants described feeling distrustful and reluctant to give their payment information upon being first contacted regarding the enquiry. This was also because of the number of spam calls that they receive. They mentioned that they would feel more confident about responding to enquiries if HMRC offered a method to confirm that the communication was legitimate. 

Accessible guidance 

Tax regulations can be difficult to understand for those without a background specialised in tax, so participants stressed the importance of guidance that is easy to read and written in plain English. 

Guidance for specific sectors 

Some participants expressed the need for guidance for specific sectors. They explained that this could give them necessary tax knowledge that they could not find elsewhere. 

One participant suggested creating an online portal with sector-specific resources that small businesses could easily refer to for guidance. They described that this could be made more user-friendly and time-efficient than having to search through tax regulations and guidance on their own.  

5.2. Rules and processes 

Simplified rules 

Participants reported sometimes having difficulties in navigating complex tax rules. Examples mentioned included paying VAT when a client from overseas offers to collect a product from the UK, or the difference between zero-rated VAT and VAT exempt products. 

Additionally, there was a view that a small business that has just reached the threshold might be tempted to do ‘cash jobs’ to avoid having to increase their prices or lowering their turnover. To mitigate this, participants suggested that the threshold for registering for VAT should be higher. Another suggestion offered was implementing a staggered approach in order help businesses transition to paying VAT. This would involve initially having to pay 5%, followed by 10%, rather than 20% directly. Only having to pay VAT on a sale after receiving the money from the customer could also help small businesses with their cash flow. 

More routine checks by HMRC 

There was a view that HMRC should focus more on preventing enquiries and providing more explanation and guidance before serious issues emerge. More routine checks were suggested as a way to do this in order to help identify potential errors and allow business owners to learn about incorrect behaviours earlier. This would help reduce the need for enquiries or minimise their consequences.  

Awareness of changes in rules 

Participants highlighted the importance of being kept up to date with any changes in tax regulations to ensure that no mistakes are made. 

One of the enquiries was caused by a mistake that was missed by the tax software used by the small business. The participant stressed the importance of keeping software providers up to date with potential changes in tax rules. 

“This stuff shouldn’t need to be audited in a way because the software that we use to record, all payments and everything go through our accountancy software, so it should all be accurate. If they can engage with the accountancy software providers to make sure that all of that is correct, then that would be great.” (small business, construction and manufacturing)

6. Discussion

This chapter will briefly discuss the key findings from the research and set out some of the potential implications for HRMC processes and activities.  

6.1. Behaviours that led to enquires 

The research found that although there was a spectrum of awareness of risk in relation to evasive tax behaviours, on the whole, the behaviours that led to HMRC enquiries were unintentional. However, challenges with recruitment and the limitations of the sample achieved mean that this may not reflect evasion behaviours in the wider population.  

The behaviours were caused by errors, misunderstandings of tax rules or differing interpretations and grey areas. Where participants may have had more awareness of risk was where they had prioritised other financial ventures above paying their tax (due to cash flow) or where they had trusted fraudulent advice without taking responsibility to investigate fully.  

The small businesses that took part in the research generally perceived VAT as an area of complexity when it came to their tax affairs. Across the sample, it was common for issues with VAT to be the cause of the enquiry. Participants suggested that there is more that HMRC could do in this area to communicate and simplify the guidelines to increase compliance. 

Once an enquiry was launched, small businesses that were able to identify what had been done incorrectly tended to have a less stressful experience and a more favourable view of their interaction. Participants who had a more negative experience of the enquiry felt that HMRC was simply trying to ‘catch them out’. They suggested that there could be value in having more regular routine checks to help educate business owners, as well as framing communication about enquiries in ways that would increase collaboration with HMRC.  

6.2. Attitudes and understanding of tax evasion 

Responses to the scenarios demonstrated that small businesses understood that the common tax evading behaviours presented were risky and wrong. However, responses also highlighted that the acceptability of these behaviours was increased in some cases, such as where there was felt to be blurred lines between personal and business finances, amounts involved were thought to be small, or the consequences were expected to be minimal. There was also a perception among some that tax evasion among small businesses was a minor issue when compared with larger scale tax evasion by large businesses.  

6.3. Engagement with HMRC 

Finally, small businesses described scenarios in which they were unsure about whether they were doing everything correctly and the challenge of being able to get all of their questions answered. While the HMRC helpline was felt to be useful, long waiting times meant that it was not seen as a quick and accessible way to get accurate information. Instead, participants sometimes took a risk where questions were unanswered rather than paying for specialist advice. Participants who had worked in larger organisations contrasted what they saw as a lack of support from HMRC with the relationship managers that large organisations had access to. They suggested that HMRC could do more to make the support available for small businesses feel accessible.

Appendix A

Table 1.1: Achieved sample with demographic information on the size of the business

Size	Achieved interviews
Small	7
Micro	8
Nano	3

Table 1.2: Achieved sample with demographic information on tax agent use

Tax agent use	Achieved interviews
Yes	11
No	7

Table 1.3: Achieved sample with demographic information on sector

Sector	Achieved interviews
Construction and manufacturing	10
Wholesale, retail, accommodation, food services, arts and entertainment	4
Information and communication	2
Other - Repair and overhaul aerospace	1
Other - Sustainability and energy	1

Table 1.4: Achieved sample with demographic information on year founded

Year founded	Achieved interviews
Before 2000	5
2001 - 2019	8
After 2020	5

1. An enquiry is launched when HMRC have reason to believe that there is an anomaly or a discrepancy in the tax returns. HMRC also uses the information it has at its disposal to carry out targeted compliance enquiries in high-risk sectors/trades, or where there is information to suggest evasion prior to a return being filed. ↩

2. Tax gaps: Summary ↩

3. Understanding evasion by Small and Mid-Sized Businesses ↩

4. Ritchie, J. et al (2013). Qualitative Research Practice. London: Sage. ↩