7 HMRC compliance mistakes SMEs commonly make and how to avoid them 

For many small and medium-sized enterprises (SMEs) in the UK, keeping up with HMRC regulations can feel overwhelming. With constant updates to tax rules, changing thresholds, and increased digital reporting requirements, it’s no surprise that businesses may unintentionally fall foul of compliance expectations. 

The good news?  

Most HMRC compliance mistakes are avoidable with the right processes, tools and understanding in place. Below, we break down the most common errors SMEs make and how to stay on the right side of HMRC. 

 

1. Poor Record-Keeping and Incomplete Documentation

Accurate records are at the heart of HMRC compliance. Yet some SMEs still rely on spreadsheets, paper receipts, or incomplete bookkeeping. 

Common Issues 

• Missing or unreadable receipts 

• Not keeping records for the mandatory 6 years 

• Mixing business and personal expenses 

• Relying on estimates during tax returns 

How to Avoid These Mistakes 

• Use cloud accounting software such as Xero, QuickBooks or Sage. 

• Digitise receipts using apps that feed straight into your accounting platform. 

• Keep business and personal bank accounts separate. 

• Schedule regular bookkeeping reviews. 

Tip: With Making Tax Digital expanding in April 2026, digital record-keeping will soon be mandatory for most self-employed individuals and landlords. Preparing now will reduce the risk of errors and future fines. 

 

2. Incorrect VAT Registration or Filings

VAT is one of the most complex areas for SMEs, and mistakes can quickly lead to penalties. 

Common Issues 

• Late VAT registration 

• Forgetting to deregister when turnover drops 

• Using incorrect VAT rates 

• Missing VAT return deadlines 

• Claiming VAT incorrectly 

How to Avoid These Mistakes 

• Monitor your rolling turnover monthly. 

• Use MTD-compliant VAT software. 

• Set early reminders for VAT deadlines. 

 

3. Misclassifying Employees and Contractors

Misclassification exposes SMEs to HMRC investigations, unpaid PAYE, and penalties. 

Common Issues 

• Treating employees as contractors 

• IR35 misunderstandings 

• Late RTI submissions 

• Wrong tax codes or incorrect payslips 

How to Avoid These Mistakes 

• Use HMRC’s CEST tool. 

• Run payroll through compliant software. 

• Submit RTI on or before each payday. 

What is the CEST Tool?

The Check Employment Status for Tax (CEST) tool is a resource provided by HMRC to help determine whether a worker should be classified as employed or self-employed for tax purposes. It is particularly useful for assessing the application of IR35 legislation, which affects how tax and National Insurance contributions are handled for contractors working through intermediaries.   

 

4. Underestimating Tax Deadlines (and the Penalties for Missing Them)

Missing HMRC deadlines is one of the most common and expensive mistakes SMEs make. 

Common Issues 

• Late self-assessment returns 

• Late corporation tax submissions 

• VAT returns filed after the deadline 

• PAYE and National Insurance payments delayed 

• Forgetting quarterly MTD updates (from 2026) 

Penalties for Late Filing or Late Payment 

HMRC can issue: 

Self-Assessment Penalties 

• £100 fixed penalty immediately after missing the deadline 

• Further daily penalties after 3 months 

• Higher penalties after 6 and 12 months 

• Interest on late payments 

Corporation Tax Penalties 

• £100 penalty (first late filing) 

• £200 penalty (if over 3 months late) 

• Tax-geared penalties after 6–12 months 

• Interest on late payments 

VAT Penalties (New Points-Based System) 

• 1 point for each missed deadline 

• When points equal the threshold → a £200 penalty 

• Additional £200 fines for further late submissions 

• Interest charges on late VAT payments 

PAYE Late Payment Penalties 

• 1% to 4% penalties depending on number of late payments 

• Daily interest on unpaid PAYE 

How to Avoid These Mistakes 

• Maintain a single, centralised tax calendar. 

• Set up direct debits for VAT, PAYE, and corporation tax. 

• Submit documents early, so don’t wait until the deadline. 

• Use an accountant or automated reminders through your accounting software. 

• Create a separate tax pot to avoid cashflow issues. 

 

5. Claiming the Wrong Business Expenses

Claiming too much or too little can lead to compliance issues. 

Common Issues 

• Overclaiming mileage 

• Treating personal purchases as business expenses 

• Forgetting HMRC-approved allowances 

• Incorrect R&D claims 

How to Avoid These Mistakes 

• Keep detailed evidence. 

• Review allowable expenses annually. 

• Use compliant mileage and expense-tracking tools. 

• Seek advice on complex claims like R&D. 

 

6. Not Keeping Up With Regulation Changes (Including MTD 2026) 

HMRC rules evolve and change. The biggest upcoming change is Making Tax Digital for Income Tax Self Assessment (MTD ITSA), arriving in April 2026 for those earning over £50,000. 

What MTD 2026 Requires 

• Digital record-keeping 

• Quarterly submissions 

• MTD-compatible software 

• An annual end-of-year declaration 

How MTD Helps SMEs 

Although it brings new obligations, MTD can reduce compliance risks by: 

• Preventing manual calculation errors 

• Reducing missed deadlines through automated reminders 

• Providing clearer, real-time insight into tax liabilities 

• Making year-end submissions simpler 

• Improving organisation and cashflow planning 

Starting now gives SMEs plenty of time to adjust well before penalties apply. 

 

7. Ignoring HMRC Letters or Enquiries

Ignoring communications from HMRC is one of the fastest ways to escalate penalties. 

Common Issues 

• Letters sent to outdated addresses 

• Failing to respond to compliance checks 

• Missing evidence deadlines 

• Hoping enquiries will disappear 

How to Avoid These Mistakes 

• Always keep contact details up to date. 

• Respond promptly to HMRC queries. 

• Work with a professional before replying if unsure. 

• Keep digital records organised and accessible. 

 

Avoiding Penalties Starts With Good Systems 

Most HMRC fines stem from preventable issues such as poor organisation, late submissions, incorrect calculations, and outdated processes. With MTD 2026 approaching, now is the time for SMEs to prepare, digitise, and build stronger financial systems. 

Strong compliance doesn’t just reduce penalties it builds trust, improves cashflow, and supports long-term growth.