Small businesses and sole traders which trade in cash face an increased risk of being investigated by the taxman after recent figures showed that the level of unpaid VAT had risen by 25 per cent in the last 12 months.

Cleckheaton and Keighley accountants Clough and Company has warned that HM Revenue & Customs is stepping up its tax investigations in 2014.

Partner Nigel Westman said: “It’s more important than ever that businesses that trade heavily in cash, such as retailers and tradesmen, have their VAT affairs in order.

“HMRC estimates that the gap in unpaid VAT increased by £1.5 billion in just 12 months, which is why it has said that it wants to find the minority who aren’t paying what is due and to protect the vast majority of honest businesses and individuals from being cheated by these unscrupulous operators.

“Even if there has been no deliberate avoidance of VAT, businesses that regularly receive cash payments could still find themselves subject to in-depth compliance checks through HMRC’s intervention process as they increase their level of VAT-related investigation activity.”

Mr Westman said checks could involve a detailed inspection of the tax records and a review of relevant documentation by multi-disciplinary teams.