Tax investigation – could it be you?
Every year around this time we see more scary stories about the increase in tax enquiries and investigations and how many successful prosecutions have been made by HMRC. But do most of us really have anything to worry about?
There’s no doubt that HMRC have been tasked with narrowing the gap between expected tax income and actual revenues and it is approaching its task with both method and diligence. It is also clear that, as their efforts are bearing fruit – for example, netting £26.6 bn from new initiatives targeting compliance in 2014/15 – this approach is set to continue.
Who could be investigated?
In its latest published annual report, HMRC estimated that they will issue 64,000 notifications to relating to tax accounts for the year 2015/16, to achieve £26bn additional income.
An undeclared number of notifications will be random spot checks. These will be issued as both a deterrent to would-be tax avoiders and in the hope they will yield unpaid tax that HMRC have been unable to identify by other means.
So, even if you declare all your income, pay your taxes on time and avoid risky tax planning (which we would always advise that you do), you may still get an enquiry notification. No one can say for sure.
To reach its targets efficiently, HMRC has invested heavily in developing its Connect computer programme. Connect trawls personal and commercial financial information and its own ‘whistle blowing’ reports to unearth links and disparities between income, assets and transactions.
It uses this data to create a picture of an individuals or organisations financial activity and compares it to what is declared to HMRC. From the notifications we’ve seen, Connect seems to respond to certain anomalies or unexpected activity and trigger an alert, which may result in some form of enquiry.
What is the likely impact of an enquiry or investigation?
Some enquiries can be resolved with a single letter. Others may go on for many months with HMRC asking for more information which you, or your professional adviser, will need to provide before the stated deadline.
If you seek professional help in dealing with the enquiry, which you would be well advised to do, you will have to pay the advisor’s fees even if HMRC ultimately agree that no additional tax is due.
In more serious cases, HMRC may prosecute on the grounds of tax avoidance and, if successful, financial sanctions and even custodial sentences may follow.
Protect yourself from unexpected costs
As the likelihood of an enquiry is hard to assess, and its potential impact is unpredictable, we recommend that our clients take out investigations fee protection insurance. This covers the costs incurred by appointing a professional adviser to respond to HMRC on your behalf in the event of an enquiry.
Professional advice greatly increases your chances of responding quickly and accurately to the enquiry and minimises its impact on your daily life. It also increases your chances of convincing HMRC that your returns are, in fact, complete and correct or, if tax is due, negotiating a favourable a financial settlement including mitigation of penalties.
For further information on tax enquiries or fee protection insurance, visit our website or contact your usual WMT team member.