Over recent years there has been a notable increase in compliance checks and enquiry activities by HM Revenue & Customs (HMRC). This seems unlikely to change particularly with tax revenues down and a significant budget deficit arising from the Covid-19 pandemic.
The latest figures state that the tax gap (the difference between the tax that should be paid and what is actually paid) in 2018-19 was £31 billion, or 4.7% of total tax liabilities. With a reduction in manpower, HMRC has increasingly relied on computer systems to reduce the tax gap. HMRC’s Connect system, rumoured to have cost £100 million to set up, can now analyse huge volumes of taxpayer data automatically and cross-reference it with a variety of sources, such as bank accounts, credit card accounts, land registry, letting agents, mortgage applications, DVLA, even Amazon, eBay, and Google Street View as well as online social networks. Coupled with the increase in information sharing from government and corporate sources both in the UK and overseas, HMRC has a significant amount of data at its fingertips.
Taxpayers can be selected randomly for an enquiry by HMRC, but it is more usual for the investigation to be targeted due to anomalies in their tax return when compared to other data held by HMRC.
Undeclared income
Common investigations relate to land and property, concerning undeclared income or the tax deductibility of expenses. With a growing number of people letting out their properties through online platforms there is increased pressure to ensure the correct taxes are being paid by the hosts. Airbnb, for example, has agreed to share data with HMRC on hosts’ income going back to the 2017-18 tax year, leading to a likely increase in investigations in future. In addition, property disposals have seen more scrutiny since HMRC’s Connect system has been able to access data from the Land Registry.
High Income Child Benefit Charge
Another popular area of investigation is the High Income Child Benefit Charge introduced in January 2013. This is essentially the clawback of child benefit payments where the person receiving them or their partner earns over £50,000. The only way to report the charge is via a self-assessment tax return. There are practical difficulties associated with the charge, particularly where couples do not know the level of each other’s income, as it is payable by the higher earner who may not necessarily be the person in receipt of the payments.
Nudge letters
There has also been much focus on offshore income in recent years following the introduction of various automatic exchange of information agreements and legislation introducing increased penalties – up to 200% of the tax due – for offshore matters. ‘Nudge’ letters from HMRC are being issued to large numbers of taxpayers encouraging them to complete certificates declaring all offshore income and gains have been reported for tax purposes.
Practicalities
Whatever the reason for the investigation, there are prescribed procedures and time limits set out in the legislation as to how and when HMRC can make enquiries into a taxpayer’s return. In general, for self-assessment, enquiries must be opened within 12 months of the return being filed with HMRC (where the return is filed by the statutory deadline). If the return is filed after the statutory deadline the enquiry period is extended. In certain circumstances, HMRC has wider powers to open an enquiry beyond these dates and can investigate several tax years.
It is important to ensure that any notice of enquiry is received within the statutory time limit and HMRC is not asking for information that it is not entitled to. The information requested must be reasonably required to check the tax position and it must be in the recipient’s possession or in their power to obtain. HMRC has become more aggressive in its approach and, in some cases, information requests have gone beyond the extent of the legislation.
Whilst it is prudent to be cooperative with HMRC, particularly when considering the potential penalty position (as cooperation will count towards penalty mitigation), there is a fine balance between being cooperative and providing HMRC with only the information they are entitled to.
Penalties
The level of penalty will depend on the behaviour of the taxpayer which gave rise to the under-declared tax, their level of cooperation with HMRC during the enquiry and whether the error relates to foreign or UK source income and gains. Not every error will result in a penalty; for example, where the taxpayer has taken reasonable care, even though the return later turns out to be incorrect. Some negotiation may be required to agree the appropriate penalty and, in some cases, the penalty can be suspended for up to two years at HMRC’s discretion. HMRC will impose certain conditions to be satisfied during the suspension period and, if those conditions are met the penalty will be cancelled.
Undoubtedly, HMRC investigations can be time-consuming and costly, not only in terms of a potential additional tax bill, as well as possible interest and penalties, but also the professional fees in dealing with HMRC and providing the right information and responses to their questions. Fee protection insurance is often available to cover the cost of professional fees.
At Saffery Champness, fee protection insurance is available to give clients peace of mind that our fees will be covered in the event of an enquiry, allowing us to take the time to achieve the best possible outcome without you bearing the cost. If you would like more details about how we can help with tax investigations or for more details regarding our fee protection insurance, please contact your usual Saffery Champness partner.
Suzanne Wasson, Director
