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.