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 19^th 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.

HMRC collected extra £3.3bn in unpaid VAT from SMEs- with more investigations likely to follow

HMRC has collected an extra £3.3bn in unpaid VAT over the last year, following investigations into SMEs. Such successful returns from these enquiries means more are likely to follow, and business owners should ensure that tax affairs are in order as a result.

The extra tax was collected by two newly created specialist HMRC teams- the Individuals & Small Business Compliance unit and the Wealthy & Mid-sized Business Compliance unit.

The underpaid tax will be the result of a combination of carelessness, genuine error or misunderstanding, as well as deliberate and calculated underpayment by a few rogue individual businesses.

Such errors, mistakes or underpayment by the minority inevitably mean, however, that all SMEs will now come under increased scrutiny, even if they have done nothing wrong.

Any probe by HMRC will be time-consuming and costly, and businesses need to ensure that they are prepared. Making sure records are up to date and in order is essential, as well as full cooperation with any HMRC staff involved in the enquiry.

Businesses are increasingly opting to protect themselves from the cost of an investigation in the event that the process should stretch out over an extended period. Enquiries have been known to last for several weeks, or even months, resulting in considerable disruption and loss of revenue.

Underpayment of VAT has been identified as a key area of focus for the Revenue over coming months, following concerns surrounding avoidance by sellers on Amazon, Ebay and other online retail platforms. It has been estimated that VAT evasion in online shopping currently costs the economy up to £1.5bn per year.

It was also announced in the Spring Budget that the government will be taking steps to crack down on overseas traders who avoid paying tax on UK sales.

Underpayment of VAT is quite clearly on the Revenue’s radar and all SMEs should therefore be prepared for a focus on any activity in this area.

An unnecessary tax investigation is an unwelcome burden whatever industry or sector you work in.

Should such a situation occur, you may benefit from Tax Investigation Protection which can help cover our accountancy fees to defend you.

HMRC’s investment in tax investigations continues to yield healthy returns

HMRC has seen a strong return on its investment in tax investigations over the last year, with spend on its teams targeting ultra-wealthy individuals, large businesses, SMEs and ‘everyday’ taxpayers yielding very healthy amounts.

HMRC now has a number of specialist units, which focus their investigatory work on particular groups of taxpayers, in order to maximize the recovery of unpaid tax.

Three key teams include the High Net Worth Unit, which focuses on individuals with a net worth of £20 million or more, the Large Business Directorate, which monitors the tax compliance of the UK’s 2,100 most sizeable companies and finally, Local Compliance, which covers ‘everyday’ taxpayers and small to mid-sized firms.

Strong returns on the Revenue’s investment in these teams was achieved across the board. The Large Business Directorate collected £73 per £1 spent by HMRC on its work, the High Net Worth Unit gleaned £29 per £1 invested whilst Local Compliance teams gathered £18 per £1 spent.

The results mean that the Revenue is likely to continue to invest heavily in targeted investigatory work. Businesses of all sizes, across all sectors, and individual taxpayers from all walks of life, will consequently continue to face close scrutiny, and should prepare for a full and potentially very costly investigation, should their affairs raise any questions.

The bar for launching an enquiry or investigation is not always set particularly high, which means innocent taxpayers with nothing to hide frequently find themselves under the spotlight. Simple mistakes or discrepancies on a tax return, or even a few unusually high-value purchases or trips abroad could end up raising suspicion. With its new database system, Connect, HMRC can keep a close eye on virtually all aspects of a taxpayer’s financial affairs and spending habits at the touch of a button.

HMRC will take into account any information it can obtain or is provided with- from data gleaned in major leaks, such as that uncovered in the recent Panama papers scandal, to details on what an individual is buying or selling on e-bay. The Revenue can now deal quickly and efficiently with new information, and will be sure to follow up any lead, however vague.

Recent scandals, alongside a related move against tax evasion and white collar crime globally, mean that HMRC is under intense political pressure to stamp out the issue and ensure all are paying their ‘fair share’. Whilst the media focus is often on large multinational corporations or ultra-wealthy individuals stashing money in complex structures offshore, those ‘lower down’ the scale will be in no way immune from the government’s clampdown. Taxpayers across the board will likely see or feel the effects of a low-tolerance approach from HMRC over coming months.

Even if a taxpayer’s affairs are ultimately shown to be entirely legitimate, dealing with any probes from the Revenue will likely be costly.

The increased risks which all of these developments pose to taxpayers mean that many are opting to protect themselves against the cost of tax investigations.

New fees for taxpayers wanting to take HMRC to tribunal

Taxpayers in dispute with HMRC will now have to pay a fee if they wish to take the Revenue to tribunal. This recent government decision has provoked criticism from lawyers and accountants concerned that the introduction of fees may prevent some from accessing justice over their tax bills.

The proposed fees range from £20 for appeals against fixed tax penalties of £100 or less, to £2,000 for an appeal hearing in the Upper Tribunal or Chancery Court. Although fees at the lower end of this scale are relatively small, fears have been raised that the existence of a fee at all may deter taxpayers from appealing against HMRC and may be increased in the future.

Indeed, when fees for employment tribunals were introduced in 2014, the number of claims fell by 80%.

Tax Tribunals are often the last resort for taxpayers who are in dispute with HMRC. The tax investigation may have already cost the individual or business a large sum. The additional cost of going to tribunal, all before establishing guilt, may seem too steep for many to pay.

Many have argued that the introduction of fees tips the balance of power in HMRC’s favour – not least because the Revenue is not required to pay them.

There are concerns that if the introduction of fees causes more taxpayers to settle with HMRC rather than going to tribunal, then the Revenue will have less incentive to be fair to taxpayers. HMRC may feel less accountable and may look to collect a higher amount from those taxpayers choosing to reach a settlement.

Another critical issue is the impact the sliding scale of fees may have on the more vulnerable, smaller taxpayers. A £2,000 fee to appeal in the Upper Tribunal may not seem expensive to a multinational corporation. However, to an individual running a small business it could have serious implications, especially when added to the cost of the investigation and the possibility of having to pay HMRC the unpaid tax if the case was lost.

It has also created confusion for taxpayers, who are paying one branch of government in order to receive a ruling against another branch of the government.

In the last year HMRC have widened their net, targeting not only increasing numbers of High Net Worths but taxpayers from all walks of life. This approach might have led to more innocent taxpayers, who have made a simple mistake on their return, being investigated by the Revenue.

There have also been concerns that HMRC’s use of its Connect database has meant that many innocent taxpayers are being targeted. The system takes information from a variety of private and public sources even from social media to determine individuals or businesses they suspect are underpaying on tax.

For those taxpayers investigated by HMRC, tribunals have previously been a way to receive an independent judgement on a dispute with the Revenue. This risk is now that many of these innocent individuals may be deterred by the new fees.

We recommend to all our clients that they consider taking out protection which will cover our fees for dealing with HMRC enquiries and investigations. Please contact us to find out more.

HMRC collects extra £3.5bn from SMEs for underpayment of VAT

• VAT investigations raise nearly half of local compliance tax revenue
• SMEs to come under even greater pressure as HMRC employs specialist taskforces for tax investigations

HMRC has raised an additional £3.5bn in the last year through inquiries into the under-payment of VAT by small businesses.

Additional VAT revenue accounted for almost half (45%) of the additional tax take in 2014/15 from investigations by HMRC’s local compliance teams, which are responsible for small and medium-sized businesses. The total sum raised through tax investigations by local compliance teams last year was £7.7bn.

The figures show that VAT is a key area of focus for HMRC as it looks to maximise tax revenue. This trend is likely to be ongoing as a small number of rogue SMEs attempt to evade VAT – placing those who make innocent mistakes on their returns in the firing line as a result.

Pressure on SMEs is also likely to increase as HMRC announces the closure of 170 of its regional offices, in favour of employing specialist taskforces to carry out tax-related investigations.

Kevin Igoe, Managing Director of PfP, comments:

“VAT investigations represent a rich seam for HMRC and the area is coming under increasing focus as a result.”

“A ‘hardcore’ of tax-evading small businesses are making life difficult for the vast majority of compliant SMEs, and leaving them facing investigations over genuine oversights and errors.”

 “Through no fault of their own, a lot of small businesses are coming under greater scrutiny, and facing expensive and time-consuming investigations. SMEs need to be particularly wary of potential pitfalls when submitting information to HMRC and ensure they are on top of their accounts at all times.”

In addition to the employment of taskforces, HMRC has also invested £80m in the optimisation of Connect – computer software especially developed to access and trawl databases of personal and commercial financial information on an unparalleled scale. Data is collected from a number of sources, including banks, local councils, legal aid data and even social media.

Connect is able to cross-reference its findings with the information submitted to HMRC by an individual or business. As of September 2016, its powers will be extended further still as it is granted access to files held by banks and other financial institutions based in British overseas territories.

Kevin Igoe, says:

“It is easy for small businesses to trip up when it comes to filing VAT returns and HMRC is constantly sharpening its senses to catch them out when this happens.”

 “VAT is an area that has been abused by some small businesses, and is therefore one that HMRC pays particular attention to.”

 “The Connect database and the employment of the highly efficient taskforces are forming a pincer movement on those who either intentionally, or more likely unintentionally, report incorrectly on their VAT returns.”

HMRC taskforces collect £109m in unpaid tax- who will be next?

Newly released statistics reveal that specialist HMRC taskforces have collected £109m in extra tax over the last six months alone. Such impressive results mean that the Revenue is likely to continue to invest money in these units, and increase the number of investigations launched.

As most accountants will be aware, taskforces are set up to target the underpayment of tax across specific industry sectors and geographical areas. They undertake intensive bursts of investigatory and surveillance work- usually lasting around nine months- to identify any causes for concern.

HMRC set up a total of 27 new taskforces between April and October of this year, targeting a range of sectors and regions. Construction workers, taxi drivers and restaurants have found themselves a focus.

HMRC taskforces have an impressive track-record. The very first were established in 2011 and over 100 have been set up since then. Over £400 million has been collected as a result of their efforts. One taskforce alone has generated over 20 arrests.

Taskforces can undertake aggressive investigatory work. Teams can turn up at any time, announced or unannounced, to inspect premises and accounts, in order to uncover taxes owed. They have a wide range of tools at their disposal to help identify any high risk targets. New powers have granted HMRC officers increased access to information held by websites and employers on workers and customers, for instance.

Taskforces can levy financial penalties of up to 100% of tax owed, so HMRC has significant potential to get a good return on its investment.

Experts predict that lawyers and a wider range of landlords could be the next targets for these specialist investigatory units, having recently been the subjects of voluntary disclosure campaigns. Often, a taskforce will step in once a declared tax ‘amnesty’ period comes to a close. Any taxpayer under suspicion who has failed to take advantage of a campaign is likely to receive particularly intense scrutiny.

With HMRC clamping down so intensively on a range of targets across different sectors and locations, many innocent clients are likely to be caught in the crossfire.

Connect generates £3 billion in additional tax revenue for HMRC

HMRC has collected a total of £3 billion from enquiries generated by its multi-million pound database system, Connect, since 2008, according to a recent report. The system has paid for itself almost 38 times over which means the Revenue is likely to continue to invest heavily in the system. As a result, more innocent clients could find themselves under the spotlight; the rigidity of a database system means that red flags may be raised on a taxpayer’s affairs where there is no real cause for concern.

As most accountants will know, Connect allows HMRC to cross-reference information supplied on tax returns with data on individuals’ and businesses’ finances stored elsewhere. It gathers information from multiple public and private sources, allowing for the quick identification of any discrepancies or possible under-reporting. HMRC has invested £80 million in the system since 2008 and currently employs over 150 analysts tasked with gleaning insights from the information collected.

Connect now automatically collates information from over 30 databases, covering details of taxpayers’ salaries, bank accounts, loans, property and car ownership. HMRC also has powers to request one-off bulk data from third parties where there may be particular cause for concern. Insurance companies, hospitals and dentists supplied information to assist with the Tax Health Plan- a tax disclosure facility set up for medical professionals – for instance.

The system also allows HMRC to ‘zoom in’ and keep tabs on taxpayers’ day-to-day activities. Officials can even track ticket sales and passenger information supplied by airline companies. Frequent flights are likely to raise question about how an individual is funding a jet-set lifestyle while regular trips to known tax havens- such as the British Virgin Islands or Monaco- are also likely to raise concerns.

Any involvement with charitable bodies is now also being tracked via a direct link to the Charities Commission database. Any payments linked to trusteeships held by a taxpayer will be monitored, to ensure that they are being declared in full.

Particularly striking is the gathering of information from social media. HMRC are now monitoring online posts about holidays, parties and purchases. They may wish to ask questions where they feel a lifestyle does not fit with an individual’s reported income.Whilst many of the leads generated by Connect’s collation of wide-ranging data are likely to be worth following up, a proportion will be unfounded. A surface analysis of data or online information could quite easily lead to misinterpretation. An exaggeration over twitter or Facebook, for example, could paint a highly inaccurate picture.

The Revenue is increasingly using Connect to establish whether leads supplied by real-life informants-via the online Tax Evasion Hotline- are credible. HMRC is now paying out record sums to informants, handing out £605,000 over the last year, which means at least some reports will be motivated by financial gain. The increased reliance on an automated system to verify information provided by these individuals could mean that a larger number of unsubstantiated claims are looked into.  Connect, of course, could be misled by the same ‘false flags’ causing the informants to suspect tax evasion.

With the threat of an investigation mounting, more taxpayers are opting to protect themselves by taking out insurance.

Average length of HMRC tax enquiries into ordinary taxpayers increases by 20% in a year

Recent research shows that the average length of tax enquiries undertaken by HMRC’s local compliance teams into ordinary taxpayers has increased over the last year, from 2.5 months in 2012/13 to 3 months in 2013/14.

Even basic tax enquiries can be very disruptive, stressful and costly to both individuals and businesses. Those enquiries can lead to a full blown investigation, where HMRC looks in forensic detail through all of an individual’s records or a company’s books.

Regardless of the whether the enquiry finds anything incriminating, the individual or business must always pick up its own bill for dealing with an HMRC investigation, which depending on its length could be a large sum. It is also very challenging for small businesses trying to deal with the disruption caused by investigations.

The rise in the average length of a tax enquiry also means that the cost of advisory fees for lawyers, to help individuals and small businesses deal with the enquiry, is likely to have increased.

Innocent individuals can easily be drawn into tax investigations because HMRC draws information from multiple public and private sources onto its database system, called ‘Connect’, which can throw up incorrect leads.

As well as helping HMRC to identify broad groups where underpayment of tax may be more common in order to examine them more closely, the Revenue also uses it to identify individual suspects. To do this, it draws data from a range of sources, including: banks, local councils, the Driver & Vehicles Licensing Agency, insurers, hospitals, online sales and purchases records, and even social media.

The use of data from banks allows HMRC to keep track of an individual’s savings and spending, or a business’s sales and investments. If these don’t align with the income or profits stated on their tax-returns, it raises a red flag to the Revenue.

HMRC can now use an individual’s social media profile to build up a more thorough outlook of their lifestyle. For example, once an enquiry has been opened by HMRC, social media boasts about expensive cars or even holiday pictures could prompt an enquiry if they do not fit with the individual’s reported income.

Data on E-commerce transactions is also used by HMRC. It uses the information to identify high volume traders making substantial undeclared revenue through auction and community selling websites like eBay and Amazon Marketplace.

HMRC makes record payments to informants

HMRC is paying out record sums to informants reporting on people they suspect of underpaying tax, as it strives to meet government targets for raising the amount of tax it takes.

Payments to HMRC informants totalled £605,000 over the last year (to March 31 2015), up from £402,000 the year before, and £395,000 in 2012/13. Around 100,000 calls were made to HMRC’s confidential telephone hotline over the last year.

The increased likelihood of a substantial financial reward means more members of the public will be tempted to come forward to the Revenue with their concerns about others’ underpayment of tax. Whilst some reports will be credible, a large proportion are likely to be unfounded, and an increasing number of innocent taxpayers are likely to face investigation as a result.

Recent tax avoidance scandals mean that the Revenue is under increased pressure to follow-up leads and demonstrate that it has acted on all of the information it is provided with, however seemingly low in quality.

The increase in the amount of money paid out also reflects the fact that HMRC is clamping down on a wider range of taxpayers. It broadened its focus from High Net Worths and those involved in traditional cash-in-hand businesses some time ago; it is now likely to be handing out rewards for information on taxpayers from all walks of life.

Finding sufficient supporting information to justify following up informants’ reports will have been made easier by HMRC’s recent investment in technology. Its new multi-million pound database system, Connect, gathers real time data from multiple public and private sources to help identify where underpayment of tax may be an issue. Information is drawn from banks, local councils, legal aid data and even social media.

Rather than having to scrutinise each tax return individually, the Connect database helps HMRC to zoom in on ‘outliers’ within a particular group. These are individuals or businesses reporting lower profits or incomes than their peers, or whose expenses seem unusually high.

With more members of the public coming forward with information, and HMRC equipped and under pressure to clamp down on any underpayment of tax, many face an increased likelihood of investigation.

The increased risk these developments pose for ordinary taxpayers means that many are opting to protect themselves against the costs that may be incurred in a tax investigation.