HM Revenue and Customs: An eye on your pie

The Revenue is hungry for a bigger slice of taxpayers’ funds. We explore the consequences.


By Neil Harris and Geraint Jones, December 13, 2010
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HMRC has new ways to detect suspicious blips in tax returns

HMRC has new ways to detect suspicious blips in tax returns

Though most of the media attention on the Coalition's latest spending round was focused on cuts in public spending, it did not go unnoticed, at least to tax practitioners, that the Chancellor was increasing the amount of money available to HM Revenue & Customs to fund additional staff to combat "tax evasion".

Taxpayers and tax advisers may have a different understanding of "tax evasion" from that conveyed by government ministers. However, HMRC undoubtedly intend to investigate more taxpayers where they do not believe the "correct" amount of tax is being paid. This is in addition to the task forces being set up to try and catch individuals who are operating in the "black economy".

HMRC were granted sweeping new powers from April 6, 2009. Although these powers were initially being used with a light touch, it is clear that if they are to raise significant additional revenue, then HMRC will have to become more aggressive. Indeed HMRC have already been told to prosecute more cases of tax evasion. Nevertheless, we believe their main focus will be to recover more funds as quickly as possible.

Over the last few years, HMRC have offered several amnesties to induce individuals to declare untaxed income, especially where it was held overseas. HMRC is also seeking agreements with tax authorities in other jurisdictions to share information or to levy withholding taxes to be passed to UK authorities.

Professional tax advisers can provide a degree of credibility that an unrepresented taxpayer may not have

Taxpayers can expect to incur withholding taxes on overseas income in some jurisdictions, which of course can be offset against UK taxes only if declared. They have even gone as far as purchasing information from an ex-employee of a Liechtenstein bank. Even the most secretive of countries, such as Switzerland, are now starting to enter into information exchange agreements with HMRC. It cannot be long before anyone with income-
generating assets overseas is likely to find that HMRC knows about them.

Under current law, HMRC can investigate up to the past 20 years of a persons tax affairs where they suspect fraud. This can result in significant tax, interest and penalties, and it has not been unknown for a taxpayer to pay over all of the undeclared funds to meet the obligation. This may get even worse now that legislation has been passed, so that in certain cases penalties of up to 200 per cent of the tax that should have been paid can be levied - in effect doubling the potential penalty. For a 40 per cent taxpayer that could result in 120 per cent of the income being paid over.

While these somewhat draconian moves will largely affect a small but wealthy group of individuals, HMRC will also be targeting many more business owners up and down the country and subjecting them to in-depth inquiries into how their businesses operate.

Over the last 10 years, HMRC have been closing many of their local offices, creating larger and larger district offices. The days of an inspector knowing his patch have long gone. Inquiries are now selected by computer analysis by comparing gross profit percentages, employment costs, and the like. It is no coincidence that from April 1, 2012 company accounts will have to be submitted to HMRC electronically in a prescribed format. This will enable computer interrogation software to be used to ascertain whether or not something looks "odd".

It is also not unknown for HMRC to embark on "fishing expeditions" in which they send out letters asking various questions or seeking confirmations that initially at least sound very innocent. The information provided can then be analysed and cross referenced to other information and then form the basis for a formal inquiry.

Taxpayers will almost invariably benefit from specialist help when dealing with HMRC. Professional tax advisers are used to dealing with HMRC each day and can provide a degree of credibility that an unrepresented taxpayer may not have.

Experienced, reputable and regulated tax advisers regard their clients' interests as paramount (though don't expect them to be complicit if you are seeking to continue to avoid declaring income!). Such tax advisers know how HMRC operate, how to handle negotiations and when sensible compromises can be achieved. We recommend that you seriously consider using a professional tax adviser to handle any correspondence from HMRC in these circumstances.

Reeves is one of the major accountancy and financial services firms practising in the South East of England. Established over 100 years ago in London, it has built a growing reputation for its award-winning tax and financial advice.

With offices in London, Gatwick and Kent, Reeves has more than 300 staff including 43 partners.

The firm is known for its award-winning tax and financial advice, winning the Large Firm category in the Accountancy Age Awards 2009 and twice being voted the UK's best tax practice in the LexisNexis UK Tax Awards.

Neil Harris and Geraint Jones are partners in Reeves' London office. Neil acts for owner-managed businesses and public companies, dealing with financial reporting, audit and assurance and cross-border transactions. Geraint is responsible for private clients dealing with tax-efficient structuring, international and offshore tax planning and trusts; he also has specialist experience managing the tax affairs of sports professionals and entertainers

www.reeves.co.uk
020 7382 1820

Neil Harris and Geraint Jones are partners in Reeves' London office. Neil acts for owner-managed businesses and public companies, dealing with financial reporting, audit and assurance and cross-border transactions. Geraint is responsible for private clients dealing with tax-efficient structuring, international and offshore tax planning and trusts; he also has specialist experience managing the tax affairs of sports professionals and entertainers

    Last updated: 12:04pm, December 13 2010