The Government has made significant financial contributions to British business since the outbreak of COVID-19, however, now the country is reopening, it will want to recoup as much of its £330bn investment as possible through taxation. It is therefore critical that businesses are on top of their tax liabilities to ensure they don’t land themselves with a HMRC tax investigation and subsequent fines.
To help businesses navigate a safe path, we asked Stuart Crook, Partner at Wellers, to explain the true power of HMRC and how it is connecting the dots to close the tax gap post-coronavirus.
How HMRC became so powerful
HMRC has been increasing in authority since its inception in 2005 in a bid to close the UK’s ‘tax gap’. This represents the difference between the amount of tax HMRC believes should be paid and the amount that is actually being paid. These gaps are significant too. For the 2018-2019 financial year alone the tax gap was estimated at £31bn, according to the HMRC’s tax gap report.
What’s more, small businesses have been identified as presenting the biggest problem, with the total gap equating to an estimated £13.4bn. This makes them a prime target for HMRC.
The most significant increase in power came in 2010 when HMRC introduced its new software called ‘Connect’. This utilises multiple data sources to create a picture of a taxpayer’s lifestyle, helping identify those not paying enough tax, either through error, avoidance or evasion.
HMRC doesn’t divulge all of its data sources, however, we do know it includes tax returns, credit cards, social media, Land Registry reports, DVLA records, and Google Street View. It even has the right to force businesses such as Apple, Amazon, and Airbnb to hand over data that would help uncover businesses and individuals that could be evading tax.
By using this information, it is able to find individuals living lifestyles beyond their means based on the amount of tax paid and their perceived lifestyle, and single-out businesses where the balance sheet doesn’t match up to its size.
Power in practice
In theory this power seems intimidating, but does it translate to action? It’s estimated that since the launch of Connect, which cost £100m to create, HMRC has recouped £3bn in lost tax revenues, so it has more than paid for itself. However, as previously discussed, a significant tax gap remains in the UK.
Despite the gap, HMRC’s power has dismantled key areas of tax avoidance. For example, there was the Liberty scheme run by the Mercury Tax Group. 1,600 people contributed £1.2bn to this scheme of tax avoidance, including famous names like Michael Caine, Gary Barlow and The Arctic Monkeys. It worked by reducing tax liabilities by making artificial losses, but it was shut down in 2017.
HMRC is also working more closely with international partners to increase global tax transparency and reduce tax evasion. It’s important to recognise the difference between avoidance and evasion here. When we talk about avoidance, it means bending the rules of the tax system in a way the law hadn’t envisioned. Whereas evasion is fraud.
Going back a decade there used to be plenty of faraway islands offering copper-bottomed secrecy to evaders. Anyone with an offshore account could be fairly confident that HMRC would never find it.
However, following a global crack-down on tax evasion, this is no longer the case. Tax authorities are increasingly collaborating and HMRC is receiving more information from offshore centres.
For small and medium sized businesses, HMRC has put much of the tax gap down to inaccurate reporting but there is also deliberate evasion. For example, some traders will take cash-in-hand and not declare the income. Another example would be owner-mangers charging personal expenses to the company. Although, it is much harder to get away with charging a duck pond to your expenses nowadays, if anyone remembers that headline from 2009.
Smaller companies should also be wary of PAYE audits. This is an area HMRC is directing a lot of attention to. If a business is selected for an audit, the taxman will be checking for the following:
- The correct employee codes are being used
- PAYE deduction working sheets
- Cash payments
- Employee benefits (including expenses)
- Compliance with NIC regulations.
Usually these audit visits result in inconsistencies being found, for which HMRC will calculate the tax and NI lost from the past six years.
Avoiding an HMRC investigation
The best way to avoid an investigation is to keep accurate records. Although a percentage of tax investigations each year are random, the majority of the time they are triggered by something suspect.
This could just be an innocent mistake in a tax return, but as HMRC is likely to be clamping down on tax to recoup as much money as possible, it’s better to remove the risk by working closely with an accountant to avoid mistakes in the first place.
It’s also wise to avoid using aggressive tax avoidance schemes. The risk isn’t likely to be worth the reward and HMRC will catch up with anyone involved. Tax investigations are costly and can take years to put to bed so it may also be worth investing in some form of fee protection that will cover the cost of accountants’ fees should your business be investigated by HMRC.
About the author
This article has been written exclusively for ByteStart by Stuart Crook, a Partner at Wellers Accountants representing SMEs in London and across the Thames Valley.
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