With faltering economic growth and increasing unemployment putting a strain on tax receipts, it is no surprise that HMRC are looking to boost revenue. To do so, they are targeting what is known as the “tax gap”, which is the estimated difference between the tax they should be collecting and that which they actually do.
The gap, last measured at £40bn for 2009/10 (pdf), consists of £15bn revenue lost through evasion, £7bn through avoidance and the remainder because of error and failure to pay. In order to close the gap HMRC have developed a raft of measures to punish uncooperative tax evaders and avoiders, whilst providing incentives for those who come forward voluntarily:
- A new penalty regime
- New powers to obtain information from taxpayers
- Agreements with authorities in Liechtenstein and Switzerland
- A series of campaigns targeted at different sectors
- A General Anti-Avoidance Rule proposal
Penalties and Powers
We have touched briefly upon the new penalty regime before, but essentially it is a harsher regime that has led to higher penalties being levied for late tax returns and unpaid tax. The new information powers, introduced around the same time, give HMRC greater ability to demand information from a taxpayer or third party, potentially going back 20 years.
Targeting Tax Havens
Agreements with tax havens such as Liechtenstein and Switzerland have drawn criticism for being too soft on tax evaders, and in the case of Switzerland for undermining broader efforts against banking secrecy. However, the stick and carrot approach has worked out quite well for HMRC. The Liechtenstein Disclosure Facility (LDF) has netted in excess of £3bn, far greater than originally expected. Despite the threat of legal action by the EU, thousands of HSBC customers with Swiss bank accounts have been targeted, offering them the opportunity to come forward if their tax affairs aren't in order.
Tax Investigation Campaigns
Closer to home, HMRC have launched a series of campaigns aimed at various groups of taxpayers, such as teachers and plumbers. Like the LDF above, these offer enhanced deals for those who come forward, such as penalties limited to 10% of outstanding tax, rather than up to 100%. However, this is paralleled by a clampdown on those who don't come forward. Indeed, the Plumbers Tax Safe Plan resulted in several arrests for tax evasion.
HMRC are increasingly using technology and co-operation with other organisations to track down tax cheats. A future campaign on e-marketplaces will use web bots to identify potential tax evaders, and HMRC have already teamed up with mortgage providers to cross-check stated earnings.
Tax avoiders are being squeezed too. Although not illegal, avoidance is defined by the Treasury as “using the tax law to get a tax advantage that Parliament never intended.” Anti-avoidance provisions have increasingly been included in tax legislation to try and reduce this, but the proposed General Anti-Avoidance Rule aims to eliminate it entirely by blocking abusive schemes that “make a mockery of the will of Parliament.”
Investigations on the Increase
Taken together, these measures are starting to bite. Tax investigations by HMRC are becoming more targeted and are yielding more money. Civil investigations teams collected an additional £8.5bn in 2009/10, up a staggering 49% from 2 years previous. Despite efforts to bring down the time investigations take, on average they still drag on for over 2 years. Investigations are both stressful and potentially extremely expensive for taxpayers. They usually require the engagement of a tax investigations specialist and are very time consuming, as they will need to go through their clients complete records in order to build a case to take to HMRC.
Honesty is the Best Policy
Although tax evaders find it tempting to believe they will never be caught, this is increasingly likely not to be the case. Volunteering information to HMRC results in lower penalties and generally more favourable treatment. Doing so within one of their campaigns can be more beneficial still, with even lower fines and potential restrictions on how many years HMRC can go back in their investigation.
If you feel you need to disclose anything to HMRC or have been contacted by them already, getting a professional tax adviser on your side is highly recommended.