The Rise of Tax Investigations

Tax Investigations

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.

Anti-Avoidance

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.

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It’s that time of the year… Tax Return Season

Christmas tree

It's true, you are probably more focused on the impending joy/pain of Christmas than tax, despite the best efforts of George “Ghost of Christmas Future” Osborne's Autumn Statement. With the 25th of December looming, the 31st January seems a long way off. However, as highlighted by our previous article ‘Self Assessment… Earlier than you think?’ a little forward planning can go a long way.

In the rush between the New Year and the end of January, most people will focus simply on getting the numbers right for their self assessment tax returns. In doing so, however, they may miss the opportunity to claim reliefs and allowances that could save them money.

A little illustration

Take, for example, capital gains tax (CGT). The flurry of Finance Acts in 2010 produced a change in the CGT rules in the middle of the tax year. Before 23rd June 2010 the CGT rate was a flat 18%; on or after this date it is 18% on the unused basic rate band (£37,400 less taxable income), and 28% on anything above this.

Quick and easy savings

This means that if you are a higher rate taxpayer, your annual allowance of £10,100 (or any capital losses brought forward from previous years) is best set against any gains incurred under the new CGT regime rather than the old one. By way of illustration, if you have one gain before the 23rd June and one on or after it, setting your annual allowance against the latter will save you over £1,000 in tax.

With the tax code running into tens of thousands of pages, it is easy to see that there are many seemingly simple tricks that the man-in-the-street is unaware of. Starting your self assessment tax return early can give you the time you need to save yourself money.

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Self Assessment… Earlier than you think?

Would you rather pay tax in one go on 31st January, or spread it out throughout the year? The latter option certainly sounds preferable, but it means you have to get your self-assessment tax return in a month early.

If you are an employee and have a tax liability outside of PAYE (for example, money earned from rent or self-employment) of up to £3,000, you can choose to have this paid via changes to your PAYE tax code. This has the effect of spreading the tax bill throughout the coming year, rather than paying it on 31st January. The deadline for this tax code adjustment is the usual 31st October for paper returns, but 30th December online rather than 31st January.

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Tax Rebates… but Beware Scams

Good news this morning for some six million people who are in line for tax rebates averaging £400 each. Less good news, of course, for the estimated one million who have underpaid by £600…

F is for Phishing

Phishing scams

However, taxpayers won't be the only ones rubbing their hands together with glee at the news. Fraudsters perpetrating phishing scams, which have already increased 300% in the past year alone, will no doubt take the opportunity to part people from their hard-earned money.

If you receive an email informing of you that you have a juicy tax rebate awaiting you, it'll be a scam. Quite simply, HMRC never send out emails about rebates; they only send letters. If you receive an email, don't respond to it but do please forward it to HMRC.

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Tutors and Coaches Next in the Firing Line

Although there has been some good news for teachers this week, private tutors and coaches have found themselves that target of HMRC's next tax amnesty. The so-called Tax Catch-Up Plan follows the Plumber's Tax-Safe Plan, which had fairly poor uptake.

HMRC get serious

Tutors in the crosshairs

HMRC seem to developing a strategy of offering amnesties, but clamping down hard on those who fail to take them up. The low uptake of the Plumber's Tax-Safe Plan led to a number of arrests of those who did not comply, and it is quite possible that HMRC will use the same scare tactics against private tutors.

Terms of engagement

In their own words, HMRC are taking aim at

“people providing private lessons, regardless of whether they have a teaching qualification… This includes, for example, tuition of traditional academic subjects, fitness and dance instruction, musical instrument tuition, art, services provided by life coaches and others.”

Those affected have until 6th January 2012 to tell HMRC that they plan on making an involuntary disclosure, and until 31st March to pay what they owe relating to the tax years up to 5th April 2010. In making this disclosure, the amount of any fine will be unlikely to exceed 20%.

If you are affected

Disclosure can be made to HMRC via their website, though you may wish to seek professional advice before you act.

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New Penalties for Late Tax Returns

The new penalty regime for tax returns first appeared in Finance Act 2009, but came into force in April 2011. It represents a considerable hardening of the HMRC’s stance on late returns. Whereas the old penalty was fixed at £100, the new regime has fines which escalate the later the return is submitted:

One day late: £100
3 months late: Daily penalties of £10, up to a max. of £900
6 months late: 5% of outstanding tax, or £300, whichever is greater
12 months late: 5% of outstanding tax, or £300
In serious cases the fine may be up to 100% of tax due

This means that even if you have no outstanding tax, you could be fined up to £1300 if your return is 6 months late. If you owe significant amounts of tax, the picture worsens considerably.

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Bridging the Tax Gap

The Width of the Gap

Measuring tape (http://www.sxc.hu/profile/michaelaw)

HMRC estimates (pdf) that there is a ‘Tax Gap’ of £40bn each year across the whole UK economy. This is the tax shortfall resulting from fraud, error, non-payment and artificial avoidance schemes. Although somewhat of a controversial figure it is a truly astounding sum and represents a figure not far shy of one third of annual Government borrowing.

Avoidance

Around a sixth of the tax gap is attributable to what HMRC deem to be unacceptable avoidance, with a further sixth due to tax evasion. In the 2011 Budget the Treasury outlined plans (pdf) to reduce tax avoidance by £7bn a year by 2015. Although there appears to have been a concerted effort to equate tax avoidance and evasion in the minds of the public, it must be remembered that the two are very different. Avoidance is not illegal, but is defined in the report as "using the tax law to get a tax advantage that Parliament never intended." Given that legislation will inevitably have some unintended implications, and that £7bn represents all of the tax gap attributed to avoidance, it would seem likely that this figure is overly ambitious.

Tightening Fraud Procedures

And so, tackling the less ambiguous world of tax evasion in an effort to bridge the gap remains a high priority for HMRC. In a consultation document issued in July of this year, the HMRC set out proposals for the toughening of its Civil Investigations of Fraud (CIF) procedures. Only the most serious cases of fraud result in a criminal prosecution; HMRC is most concerned with collecting the outstanding tax so will usually waive its right to prosecution in return for disclosure and payment of taxes and appropriate fines. HMRC is bound to the civil process unless "materially false statements are made or materially false documents are provided with intent to deceive in the course of a civil investigation", which means it is relatively easy for tax evaders to use the CIF to stall proceedings. This currently results in no disclosure being made in around 20% of CIF cases. HMRC are therefore proposing to introduce the "Contractual Disclosure Facility" (CDF), which forces those who wish to take the civil route to sign a contract stipulating what they disclose and when. Failure to meet the terms of the contract will result in criminal prosecution.


Involuntary Amnesty

Another example of HMRC toughening its stance has come about as a result of the poor take-up of the Plumbers Tax-Safe Plan. This amnesty for trades, like a similar scheme for medical professionals in 2010 that also had limited uptake, promised smaller fines of 10 to 20% and a scope of 6 years (rather than the past 20 years) in return for disclosure of unpaid tax. The 31st May deadline for registration passed with few taking advantage, and HMRC has taken the historically unprecedented step of arresting 5 plumbers and putting 600 others under civil investigation. After an effort to appear more approachable through the use of amnesties and immunity from criminal prosecution, HMRC is clearly signalling its intent to stamp out tax evasion in a more authoritarian manner.

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Can You Afford Personal Tax Advice?

Good Tax Advice will Pay its Way.

For most of us there are only two ways of increasing our wealth: earning more money or saving it. In these difficult times it has become a necessity for many to cut expenditure. But how many of us spend hours looking for discounts on small purchases when the yield from such efforts might be a few pounds a month? Might there be better ways to save money?

Where to Save Tax

Most of us make the assumption that the taxman knows what he’s doing and is taking the correct amount of tax. But is he? We imagine that our employers are doing all they can to reduce our tax burdens. But are they?

There are many simple ways in which our tax bills might be higher than necessary, and consequently it may be possible to reduce them simply too.

Saving vs. Avoiding

As an aside, this is not tax avoidance, but rather ensuring that you are not paying more than you should be. Tax avoidance schemes, which have received much negative press, are very different, contravening the spirit of the law if not (yet) the letter of it. They tend to be very contrived and often high risk, and are being targeted by HMRC who have provided guidance on what they regard as unacceptable.

Where to Start

The tax system can be somewhat complicated, but educating yourself using HMRC’s website is a good start. If you need help, or feel that you may be missing some money-saving opportunities, consider investing a little time and money with a tax adviser. They are not as expensive as you might imagine, and it would be unusual if you didn’t at least cover your costs in a lowered tax bill. It is important, though, to be organised and focussed in your questioning. If you hand over a box of papers to sort out it will of course be expensive as it will take hours to understand what you have been doing. Tax advisers need to spend a significant proportion of their day keeping up with the changes in the tax legislation in order to best serve your needs!

Help for those on Lower Incomes

Those on lower incomes may be able to get help from one of two charities that provide free tax advice:

  • TaxAid – provides a helpline and free access to tax advisers for those on an income of 60% of median earnings (around £16,000).
  • TaxHelp for Older People – help for the over 60s with a household income of under £15,000.

Choose Wisely…

Lastly, a word of warning: Please ensure that you go to a qualified adviser such as Alvery in order to get the best quality advice. You can check whether a company is a member of a professional body by going to their websites: the ICAEW or CIOT.

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