What are the chances I’ll be investigated by HMRC?
Apr 06, 2017
It’s safe to say that the likelihood of becoming the subject of a tax enquiry by HMRC has risen significantly over the past few years. During 2016 alone investigations by HMRC increased by 8%, as the government department found itself under growing pressure to crack down on tax abuse. Scandals such as the Panama Papers leak last May have resulted in a renewed energy on the part of HMRC to ramp up its enforcement activity.
How is HMRC increasing its investigations?
HMRC is helped in its efforts by a sophisticated analytical software engine called Connect. This uses intelligence to identify suspect businesses to focus on, by detecting apparently invisible relationship networks. It analyses financial databases from a wide variety of third party sources and cross-references the data with its tax records, to flag up anomalies and thereby spot businesses that might be under-declaring or not declaring income.
This action is coupled with the deployment of the common reporting standard (CRS), which is the automatic exchange of financial information between tax authorities in different countries, to help prevent tax evasion. It means that HMRC also receives information from other countries, increasing its chances of discovering irregularities amongst the tax affairs of UK businesses and residents with financial accounts and investments overseas.
How can I reduce the likelihood of a tax enquiry?
Whilst a tax investigation can be an unlucky element of business life, (it’s estimated that 7% of enquires are purely random), it’s fair to say that certain types of business may find themselves more prone to come under the spotlight. For example, if you’re a cash business you’re likely to attract more attention, whereas those with a clear paper trail may be more likely to remain under the radar. Also, if you file your tax returns on time and always pay what you owe then you will come across as more organised, and thereby less likely to have filed errors on your return. Equally, if you take pains to declare all the details of your entire income, it’s more likely that your tax return will match the information that HMRC receive about your finances from other third party sources.
What is the process involved?
If you do receive notification of a tax enquiry it’s important to respond to it promptly, and to be as professional and accommodating as possible. There are two types of enquiry – Aspect and Full. Aspect enquiries refer to a specific tax return, whereas a full enquiry is more extensive. Even a simple aspect investigation involving a few rounds of correspondence between HMRC and the tax payer can last for 3-6 months, whereas the average duration for a full enquiry is 16 months, and some can even take years to resolve.
In order to reach a satisfactory conclusion it is sensible to take professional advice. Even if the enquiry seems routine, a loosely worded response to HMRC can delay the investigation and lead to it being extended into other areas. If you are professionally represented it helps to mitigate the impact of an inspection, which can become very time consuming for a business owner. If you’re an SME, it is also sensible to consider taking out tax investigations insurance, so you can be professionally represented without the fear of sizeable additional fees.
What are the implications?
If further tax is found to be due as a result of an enquiry, it is usual to expect penalties to be raised. However, it’s important to recognise that if you are found liable for penalties as a result of a tax investigation, you can consider challenging any severe charges raised by HMRC. Recently HMRC has become more aggressive in its approach, and categories of taxpayer behaviour which might once have been classed as ‘careless’ are sometimes now being classed as ‘deliberate’. Similarly HMRC may try to categorise an innocent mistake as ‘failure to take reasonable care’. In some cases a penalty may even be suspended, subject to the taxpayer demonstrating full compliance for an agreed period of time.
If you have any unstated tax income it is always better to come forward and declare it to HMRC before they come to you. If you take out tax investigation insurance cover, such as the Tax Investigation Service offered by Paish Tooth, this needs to be set up before a tax return is submitted rather than after an enquiry has been opened by HMRC. The team at Paish Tooth are here to help if you have any concerns whatsoever about undisclosed tax income, so please don’t hesitate to get in touch.