Watch out – it’s the tax inspector
It’s the telephone call or letter every business dreads – HMRC is to investigate your tax affairs.
So how and why does this happen and what can you do about it? Partner Rebecca Abbott looks into the detail.
How does HMRC select tax returns for enquiry?
Holding more information than the British Library, Connect is the name of HMRC’s data analysis system which helps identify potential enquiry cases.
Data from more than 28 different sources is fed into Connect, including property transactions, bank and building society account details, Companies House records and even referrals from the Tax Evasion Hotline.
HMRC investigators then use a visualisation tool, similar to a spider’s web, to navigate around all the data to help map an individual’s unique financial fingerprint and highlight discrepancies between the picture HMRC has built of them and the tax liabilities they are declaring.
Campaigns
If similar discrepancies arise across a trade or profession, HMRC considers launching a Campaign.
A campaign begins with a disclosure window, whereby favourable penalty terms are offered to those who voluntarily come forward to admit errors.
However, once the window has closed, HMRC adopts enforcement action and launches enquiries and criminal investigations.
Doctors, plumbers, electricians, e traders and fitness coaches have already been subjected to the campaign approach which has delivered £596m for HMRC since 2007, with a further £338m from subsequent follow up activity.
Task Forces
Alternatively, a Task Force approach may be pursued, which often involves multi-disciplined Government agency teams joining HMRC in geographically-based interventions.
Second hand motor traders and scrap metal dealers have been just two of the business sectors caught up in this approach, but so too have people identified by HMRC as having ‘hidden wealth’.
Hidden wealth task forces have involved HMRC pursuing people it suspects of living beyond their means based on their declared assets.
HMRC has brought in more than £190m from the 70 task forces it has initiated since 2011.
Benchmarking
The latest tactic deployed by HMRC has been the use of benchmarking.
For example, HMRC has reviewed all the accounts submitted by painters and decorators over the last three years and arrived at a net profit benchmark range of 59-79%.
Anyone trading below the benchmark range can expect an intervention from HMRC. A similar exercise has been undertaken with driving instructors.
Summary
Last year, HMRC delivered a record £23.9bn from compliance activity and is on course to meet even higher targets set by the Treasury in future years.
A tax investigation is no longer started based solely on a ‘hunch’ or a dubious entry on a tax return.
Connect has streamlined HMRC’s research and ability to trawl bulk data, resulting in highly- focused inspectors who know far more about people and their businesses than ever before and where to look for errors.
RNS Chartered Accountants is committed to offering our clients the very best level of service and expertise.
We offer a Tax Investigation Service to protect you against the risk of the considerable professional costs which would be incurred should an enquiry be raised relating to you or your business.
A letter to all clients in November will give further information on how to subscribe or renew a subscription.