HMRC looks to increase revenue from investigations – 46% rise in penalties for ‘deliberate’ errors on tax returns

HMRC has stepped up their hunt for extra revenue by increasing the number of penalties imposed on taxpayers for ‘deliberate’ errors on tax returns by 46% in the last 12 months up to 6,125 in 2017/18 from 4,138 in 2017/18.

The dramatic increase in errors deemed to be ‘deliberate’ allows HMRC to charge taxpayers much higher penalties. HMRC accuses taxpayers of ‘deliberate’ behaviour when it thinks an error on a tax return was not an accident, or the taxpayer knew of an error and chose not to correct it.

The penalties for ‘deliberate’ or ‘deliberate with concealment’ errors range from 20-100% of the potential lost tax revenue, whereas ‘failure to take reasonable care’ errors can only receive a maximum penalty of 30%.

The increase in the number of ‘deliberate’ penalties imposed has risen for a number of years now, coinciding with a fall in the number of  penalties imposed for ‘careless’ errors.

Individuals who are told by HMRC that they face a fine for making a ‘deliberate’ error should check this with their accountant. The line between ‘deliberate’ and ‘accidental’ mistakes is quite blurred and there may be a chance your accountant can have your mistake reallocated to a category with a smaller fine.

After applying a penalty to a taxpayer, HMRC is allowed to track the same taxpayers for years to come, allowing for potentially even more revenue to be collected in the future.

However, HMRC is not just targeting individuals in its drive for more revenue. It is now increasingly targeting businesses, especially SMEs.  It believes that 22% of SMEs are filing incorrect tax returns, all of which are potentially facing tax investigations, which can be lengthy and costly.

HMRC blames small businesses for 42% of underpaid tax

HMRC is poised to ramp up investigations into small businesses after revealing that it suspects them of underpaying 42% of the total amount of tax underpaid last year – the most of any taxpayer group.

The Government’s official “Tax Gap” figures show that HMRC suspects small businesses of underpaying £13.7bn in tax out of an overall total of £33bn underpaid last year. This is more than the suspected amount underpaid by large and mid-sized businesses combined (£10.9bn).

The Tax Gap is the difference between the amount of tax that should in theory be collected by HMRC and what is actually collected. These annual estimates can be a good indicator of where HMRC is likely to focus its future investigations in order to boost its tax take.

Crucially for small businesses, HMRC revealed that it thinks 22% are filing incorrect tax returns each year. This is a worryingly high figure and means that HMRC could potentially investigate one in five of the tax returns it receives from small businesses, putting many at immediate risk of an investigation.

Additionally, if HMRC starts to suspect that a larger proportion of smaller businesses are filing incorrect tax returns, then it may start investigating even more cases.

HMRC is likely to ramp up the number of investigations into individuals as well – the suspected underpayment of personal taxes has increased by 17% in the last year alone to £3.4bn, up from £2.9bn in 2015/16.

Small businesses and individuals have long been a target for HMRC as they often do not have the resources to defend themselves in investigations. In comparison, larger businesses often have in-house legal teams, or the resources to hire experts, that can negotiate with tax inspectors and limit inquiries.

With HMRC looking to increase its annual tax take, both individuals and businesses need to be more careful than ever about their tax affairs and review their current arrangements.

Following HMRC’s latest crackdown on restaurants, who’s next in 2018?

Following the recent crackdown on restaurant businesses, which sector is going to be next to face inquiries from the taxman? HMRC teams are sequentially targeting different sectors of the economy as it looks for new sources of revenue.

The latest sign restaurant and takeaway businesses are being targeted is that they made up 19%* (25 of 133) of all the businesses and business owners ‘named and shamed’ by HMRC as ‘deliberate tax defaulters’ this month. The businesses named have already faced an investigation and the list is a good indicator of HMRC’s current sectoral focus.

HMRC has been targeting restaurant and takeaway businesses as it believes they are more likely than most to under-declare income.

The sector is now facing more stringent checks than ever before and as a result, many businesses could be at risk from an investigation. HMRC is collecting data directly from payment terminals and cross-referencing the information with its existing records to check that payments match declared income.

The monitoring of electronic payments is a tactic that can be used across many other sectors of the economy and for any business that accepts card payments. This means that whichever sector HMRC targets next is also likely to be subject to these automated checks.

Another sector recently targeted by HMRC is internet retailers. As part of this crackdown, HMRC launched investigations into more than 2,500** retailers it suspected of not paying the right amount of VAT on goods they import. Other sectors targeted in the past include: solicitors, medical practices and buy-to-let landlords, showing just how broad HMRC’s focus can be.

As accountants will already know, many of the businesses targeted by HMRC in its crackdowns are small and medium-sized enterprises (SMEs). These businesses are often viewed as an easier target by HMRC as they are unlikely to have the in-house resources to close down or limit tax investigations.

With HMRC under pressure from HM Treasury to increase its revenue, it is yet to be seen which sector it will target next.

Investigations can be costly, disruptive and stressful for clients and may result in long-term reputational damage. Consequently, clients need to be aware that even simple errors on a tax return can be a red flag to HMRC and could lead to an investigation.

HMRC gets tough on self-assessment taxpayer errors

HMRC returns from personal tax investigations have jumped by 64% in the last year, as the threat of expensive and drawn out court action has discouraged people from fighting their tax claims.

HMRC has collected £1.4 billion in 2016/17 from investigations into self-assessments by individual taxpayers, a steep rise from the £856 million collected in 2015/16.

These investigations have been one of the fastest growing revenue streams for HMRC.

HMRC has taken to highlighting its recent success rate in court actions and litigation in warning letters to taxpayers, deterring them from letting the case reach court. This has led to more and more taxpayers settling up with HMRC to avoid lengthy and expensive court cases.

HMRC have used improvements in the way they collect information as a way to help generate additional revenue. HMRC is able to collect better information on taxpayers that can lead to more investigations through its use of new technologies and “Big Data”.

Increase in HMRC fines for ‘deliberate errors’

Added to this, the number of penalties imposed by HMRC on taxpayers for making a ‘deliberate error’ on their tax return increased by 19% to 34,000 in 2016/17.

Fines are handed out to taxpayers when an error on a self-assessment return is deemed to be deliberate, or a known error is not corrected.

The increase in penalties reflects HMRC’s renewed hunt for revenue. Deliberate penalties carry much higher penalties than those HMRC consider to be careless, so they are a great revenue earner for the tax authorities.

Imposing penalties for deliberate errors also mean that HMRC can monitor that person’s tax affairs for years to come, a decision the taxpayer cannot appeal.

In both instances HMRC is giving a clear message to taxpayers: pay up, or face the consequences.

HMRC warns businesses that it will not compromise when taking legal action – creating more risks for innocent taxpayers

HMRC’s Executive Chairman Edward Troup has warned taxpayers that HMRC will not compromise when taking legal action against them. Taxpayers can therefore expect HMRC to maintain its increasingly hard-nosed attitude in any upcoming investigation.

Troup was speaking at PfP’s Tax Investigations Conference in London on Friday 13th October.

During his speech, Troup warned that HMRC would look to take tax disputes to court wherever necessary. He also stated that HMRC would not settle outside of court for anything less than what it thinks it is owed and would not split the bill on any outstanding payments.

What this means is that if you cannot persuade HMRC at an early stage that you are paying the right amount of tax they may be relentless in their pursuit. This makes it more important than ever to have a tax professional to help you in your dealings with HMRC.

This warning comes as HMRC looks to increase the revenue generated through its compliance work and close the tax gap. This is the difference between the amount HMRC thinks it is due and what it actually collects. Last year, the tax gap increased to £34bn, up from £33bn in 2014/15.

HMRC believes small and medium sized enterprises (SMEs) were responsible for 46% (£15.5bn) of the overall tax gap in 2015/16.

SMEs are often viewed as an easier target by HMRC as they are unlikely to have the resources to employ in-house tax specialists who can close down or limit tax investigations.

Indeed, new data shows that HMRC collected £504m in extra revenue from investigations into the tax affairs of SMEs last year, an 8% increase on the £468m it collected in 2015/16.

Tax investigations can be costly, disruptive and stressful for SMEs, and may even result in long-term reputational damage.

HMRC investigations into SMEs yield over £500m in the last year

In order to maximise revenue, HMRC is stepping up investigations into small and mid-sized enterprises (SMEs). As a result, more and more SMEs are now at risk of an inquiry from the taxman.

New data shows that HMRC collected £504m in extra tax from investigations into the tax affairs of SMEs last year, an 8% increase on the £468m it collected in 2015/16.

This increase reflects HMRC’s increasingly aggressive stance towards smaller businesses as it faces pressure from HM Treasury. Last year, HMRC collected £28.9bn through all of its compliance activities, up 40% from the £20.7bn it collected five years ago.

SMEs are often viewed as an easier target by HMRC as they are unlikely to have the resources to employ in-house tax specialists who can close down or limit tax investigations.

In the past, HMRC has typically targeted cash-only SMEs in its compliance investigations, such as restaurants, bars and other retailers, as they are more likely to under-declare their income.

However, HMRC is broadening the types of businesses it attacks – now non-cash businesses are increasingly likely to be investigated.

To do this, HMRC is making use of the Card Transaction Programme, introduced in 2013, which tracks payments received by SMEs through debit and credit card transactions. The data is then cross-referenced with HMRC’s Connect database.

This helps HMRC identify any discrepancies between what income SMEs receive and what they actually report to HMRC. Any inconsistencies are flagged for investigation.

Consequently, business owners should be aware that even simple errors on a tax return can be a red flag to HMRC and could lead to an investigation.

Tax investigations can be costly, disruptive and stressful for SMEs, and may even result in long-term reputational damage.

HMRC collects extra £3.4bn from SMEs following VAT inquiries

In order to maximise its revenue from compliance investigations, HMRC is putting increasing pressure on small and medium sized businesses. As a result, many businesses could be at risk of inquiries into their tax filings.

For example, data recently disclosed by HMRC shows they collected £3.4bn in extra tax through investigations into SMEs for underpaid VAT alone.

Revenue from compliance investigations into SMEs has remained high and this is likely to continue as HMRC puts the tax returns of SMEs under greater scrutiny. VAT revenue accounted for almost half (49%) of the additional tax take from investigations into SMEs – an even higher proportion than last year (45%).

As VAT can generate considerable extra revenue for HMRC, we can expect the number of inquiries into SMEs to remain at a high level.

This is especially the case given the impending introduction of the Criminal Finance Act (CFA) in September 2017. The CFA will make it possible for HMRC to prosecute companies that fail to prevent staff, agents or contractors from assisting or encouraging tax evasion. This will, therefore, widen the range of targets which HMRC could investigate for the underpayment of tax.

HMRC’s inquiries can be costly, disruptive and stressful for SMEs, especially for those who do not have contingency plans in place to deal with a long tax investigation. In order to avoid such inquires, and subsequent fines from the taxman, SMEs must ensure they are fully compliant. If in doubt, company directors should seek professional help from an accountant.

To maximise its future revenue, HMRC will also look to use other tools at its disposal. This may include use of its Connect database and taskforces to identify those it suspects may be underpaying on their tax, as well as more aggressive tactics such as Accelerated Payment Notices (APNs) and property raids.

SMEs should be aware that even simple errors on a tax return can be a red flag to HMRC and lead to an investigation.

HMRC sees falling yields from investigations into individuals and SMEs – crackdown from Revenue expected

HMRC is seeing falling yields from its investigations into individuals and SMEs and as a result, may ramp up activity in order to maintain the returns made through investigations.

Investigations into individuals and SMEs yielded £15 for every £1 spent on investigatory staff last year, down 17% from the £18 yielded for every £1 spent in 2014/15.

With HMRC seeing lower return on investment from current investigations, it’s likely that the Revenue will look to spread the net further in order to continue to meet its targets for tax investigations.

Falling yields from investigations may suggest that HMRC has already fought and won easier cases which involve significant amounts of tax, and now may be working on tougher, more complex cases and also investigating more innocent taxpayers. This is having an impact on its returns.

Although yield per pound has fallen, this must also be balanced against the fact that HMRC’s overall yield from compliance checks rose from £26.6 billion in 2015/16 to £28.9 billion in 2016/17 – suggesting they are selecting greater numbers for enquiries but not always the right targets.

However, despite the increase in overall yield, the £1.8bn in additional funding promised by the Government over the next few years means HMRC is still under pressure to perform.

In order to do so HMRC could look towards other tools at its disposal to boost returns.

For example, HMRC could increase the number of raids it conducts of people’s homes and businesses in order to seize crucial information and evidence. This evidence could then be used by HMRC to prosecute and levy fines.

The total number of property raids undertaken by HMRC has already increased 8% over the last year, from 1,449 in 2015/16 to 1,563 in 2016/17.

There may also be a further uptick in HMRC investigations into SMEs following the introduction of the Criminal Finance Act (CFA) in September 2017. The CFA will make it possible for HMRC to prosecute companies that fail to prevent staff, agents or contractors from assisting or encouraging tax evasion.

It’s also likely that the Revenue will be making greater use of its Connect Database, which allows the Revenue to cross-reference data on taxpayers from a variety of sources and will flag up any inconsistencies.

Taxpayers should be aware that even simple errors on a tax return can be a red flag to the Revenue and could lead to an investigation.

Investigations can be very costly, disruptive and stressful for individuals and businesses, and may even result in long-term reputational damage.

The majority of online self-assessment tax returns are submitted by accountants- and for good reason

The majority of taxpayers choose their accountant to file their tax returns. Research revealed that 65% of taxpayers instructed an accountant when dealing with online tax returns.

This highlights the vital role that accountants continue to play in guiding clients through the complexities of the system.

As many taxpayers will realise, filing tax returns is not always straightforward and can be time consuming.

Using an accountant not only takes away the stress of filling a return but can also help to ensure that no mistakes are made on the return.

Innocent errors on a tax return can be a red flag for HMRC, and may draw unwanted attention to the taxpayer.

Added to this, employing an accountant will ensure that the returns are filed on time, preventing the taxpayer from incurring hefty fees, and scrutiny from the Revenue. Last year 870,000 self-assessed taxpayers filed their returns late.

Filing online can make it easier for HMRC to spot errors and inaccuracies so taxpayers and their accountants must make sure that there are no mistakes on the return. HMRC’s Connect database allows the Revenue to cross-reference and scrutinise information easier. If HMRC find any errors the taxpayer could find themself under investigation.

Tax investigations can not only be costly but can also be disruptive and upsetting- employing an accountant to help with tax returns can be a useful way to avoid making mistakes.

Although, HMRC’s Making Tax Digital plans have been put on hold due to the recent general election, it is likely that they will come in eventually. The announcement of the Making Tax Digital plans caused concerns throughout the accountancy profession that the move online could mean taxpayers may make more mistakes on their return.

With 65% of taxpayers choosing to use an agent the value the accountants bring to the process is evident.

Will a crackdown on work expenses follow on from HMRC’s probe into employees’ use of the tax relief?

Concerns have been raised that the recent HMRC probe into tax refunds for work expenses such as travel, laundering uniforms and professional subscriptions could result in a full crackdown by the Revenue.

HMRC’s consultation into work expenses was launched after the cost of the tax relief rose by a quarter in five years to £800m.

Employees can claim for the tax relief for expenses that have not already been refunded by their employer- these claims can amount to hundreds- or even thousands- of pounds for workers.

Although the Revenue has stated that it has no current plans to remove the relief, the cost is significant. Therefore, the aim of the consultation is for HMRC to understand the uses of the tax relief- and ensure that it is being used in an appropriate way.

If HMRC find that the relief is not being used in the way that it was intended, then it’s possible that the rules could change, and a subsequent crackdown on misuse could begin.

Indeed, in the consultation the Revenue points out that the rules for the relief were first introduced in the 19th Century, and so one of the aims will be to ensure that they still fit for the modern economy.

One of main reasons behind the increase in costs is thought to be that there has been a growing awareness that the tax break is available. Added to this, new technology including online banking apps allow taxpayers to keep better control of their finances, therefore allowing them to keep better track of what they spend on work related activities on a day to day basis.

However, should the Revenue decide that the rules concerning the tax relief need to be reviewed or are being used in an inappropriate way by some taxpayers then steps may be taken to counter this.

As many will be aware HMRC has been under increasing pressure from the government to crack down on taxpayers who are not paying their fair share of tax. Anyone they view to be misusing the tax reliefs for out of pocket expenses may be at risk of an investigation by the Revenue. This could mean even innocent taxpayers could be investigated by HMRC.

Self-employed taxpayers in particularly have been subject to investigations by the Revenue on work related expenses.

Tax investigations can be disruptive and costly; keeping clear records of expenses is an important way to avoid any suspicion from HMRC. Any taxpayer, who is unsure of what they can claim as part of the work expenses tax relief, should consult a professional.