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The past few years has seen HMRC provided with additional powers and resources to tackle tax evasion and tax avoidance. They have been encouraged by the Government to develop more and more sophisticated approaches to identifying and recovering the missing tax they believe is payable by businesses and individuals.
Today HMRC can obtain and analyse data from many sources including card transactions, banks, (including overseas banks), employers, UK and overseas investments, pension providers, local authorities and other businesses. Access to this information provides them with the ability to challenge the accuracy of business accounts and tax returns.
An investigation can either be of a targeted approach or ‘random’ selection primarily based on HMRC’s analysis of the risks to the revenue in the conduct of certain types of business and industry sectors. Historically the focus was on cash businesses where the scope for under - declaring income was seen as greater. However, with modern technology the opportunities to evade tax have become more sophisticated. HMRC are now on the lookout for less obvious methods of hiding income such as electronic sales suppression.
For the average individual taxpayer there remains the ever-present risk of making simple mistakes and misunderstandings of income and gains leading to the filing of an incorrect Self Assessment tax return. HMRC commonly identify simple errors and omissions from tax returns by, for example, checking information about employer pay, benefits etc with what is shown on the return. This is called a ‘compliance check’.
Businesses may receive notice that HMRC would like to conduct a VAT inspection or check that PAYE has been correctly operated. This may involve a visit to the business premises. If routine checks by HMRC on one aspect of a single tax return or set of business accounts highlight possible widespread errors or omissions a more in depth or ‘full’ enquiry may be launched.
First contact from HMRC is by letter or email with a request for information or explanations of discrepancies with information held by them. The taxpayer or business will be told the nature of the investigation (normally a ‘compliance check’ at this early stage).
If the enquiry is more complex and particularly if a business is involved, there may be a request for additional documents and extracts from business records. The enquiry usually proceeds by correspondence and telephone calls but in some cases a meeting with the Revenue Officer may be suggested. HMRC will visit a business or meet a taxpayer at his/her accountants office if necessary.
The scope and length of an enquiry or investigation is likely to depend on the depth and extent of the potential tax loss. Minor compliance checks where tax underpaid is easily quantified and not disputed are usually settled quickly. Serious and significant evasion by businesses or individuals can lead to a review going back 20 years. Such cases are rare and tend to be very protracted.
HMRC will take a view as to whether any understatements of income and subsequent loss of tax was careless or deliberate. They can apply a range of financial penalties ranging from 30% to 100% of the tax lost depending upon the level of culpability of the taxpayer. Factors influencing possible mitigation of penalties include early and unprompted disclosure of the potential tax loss and the taxpayer’s co-operation during the course of the enquiry. A desire to reach an early agreement and settlement of the liabilities will go in the taxpayer’s favour.
In addition to having to pay the unpaid tax and any penalties, there will also be statutory interest payable on the additional tax due dating back to the time it should have originally been paid. If there is a substantial settlement required, taxpayers may seek time to pay and/or payment by instalments. This has to be negotiated with HMRC on an individual basis and they will examine a taxpayer’s means before agreeing any such arrangements.
Dealing with HMRC during an investigation can sometimes be difficult for the average taxpayer and it is recommended that an accountant or tax adviser is asked to help, except in the most minor and simplest of enquiries. Unfortunately, if the enquiry is complex and extended, having professional support can be expensive. However, in the long run this may prove to be worth it in the investigative and negotiation phases of the enquiry where an experienced agent can argue a client’s case more effectively than a stressed taxpayer going solo.
It may not be possible for individuals to avoid enquiries from HMRC at some point in the lifetime of their business or when their personal tax affairs become more complicated, but certain steps can be taken to reduce the risk. Every taxpayer is required by law to keep sufficient financial records to enable them to complete their Self Assessment tax returns accurately and on time. The same goes for businesses who will need more extensive records covering all their commercial transactions.
Taking competent accountancy and tax advice in determining the taxable nature of transactions may prove to HMRC that a taxpayer has met the ‘reasonable care’ aspect of their tax obligation. Many taxpayers, accepting that they may, at some point, have a challenge or query from HMRC on their tax return opt for their returns to be completed by an accountant or tax adviser and seek professional help if selected for a check.
PayStream offers a Tax Return Service which has an investigation protection service option. This provides taxpayers with the preparation, review and checking of the Tax Return and no-cost support in the event of any HMRC enquiry, compliance check or investigation on any tax return submitted by PayStream.
We're on hand to give you help and support if you come under HMRC’s microscope.
