Increased HMRC Investigations – are you prepared?

Charlie Thompson, Tax Consultant at WR Partners

By Charlie Thompson, Tax Consultant

Throughout the COVID-19 pandemic, HMRC had to deploy vast numbers of people to operate the numerous support schemes introduced by the Government – most notably the furlough scheme and the self-employed income support scheme.  Consequently, taxpayers could be forgiven for thinking that HMRC enquiries were a thing of the past. However, with social distancing measures lifted and furlough now ended, people are soon to be shaken from that complacency as HMRC ramps up its enquiry activity once again.

Compliance Checks

HMRC have opened 169,000 compliance checks in the last six months, up almost 50% from the previous six months! This surge in activity suggests that HMRC are increasing their focus on tax investigations as they try and bounce back from the Covid deceleration. 

But what is a compliance check?

A compliance check is an investigation into one’s tax affairs and is usually carried out when HMRC believes tax has been underpaid. 

HMRC’s compliance effort is supported by the “Connect” system – a broad database with at least 22 billion (and growing) individual lines of information from the UK and globally. This is then used to cross check information received from: banks, overseas tax authorities, PayPal, Amazon, public social media profiles and many other sources.  Any inconsistencies identified can easily result in a “please explain” letter coming through the post.

With the Government lifting social distancing measures, HMRC will be able to carry out a higher percentage of its compliance work in person. This could consist of having face-to-face interviews and premises searched, which may lead to more charges being brought forward.

The rest of HMRC’s workforce, who were overlooking the furlough scheme, have now returned to their compliance work. Therefore, HMRC will be able to operate at an increased capacity which could result in more investigations. 

Covid support

An obvious target and one which has been receiving a great deal of attention, are COVID support payments themselves. 

At one point, these were seen to represent something of a bottomless pit of money and that there were undoubtedly many dishonest individuals who took advantage in a fraudulent way. HMRC are now devoting extensive efforts to pursuing those who have made false claims and, furthermore, continue to look at those who may have claimed legitimately but have gotten things wrong – however inadvertently.

Taxpayers need to ensure they are actively keeping on top of their tax affairs; those who have concerns should take immediate action to avoid being investigated.

Reasonable care

Across all enquiries, a key phrase is “reasonable care.”

If a taxpayer has taken reasonable care in filing their return but has still made an error, HMRC will look to recover additional tax and interest (potentially going back 4 years) but will not charge a penalty. 

However, if a taxpayer has failed to take reasonable care, then HMRC can go back six years (four years for VAT) and can charge a penalty of between 0 and 30% of any underpaid tax. If HMRC believes the taxpayer has intentionally filed an incorrect return they can go back 20 years and the penalty can be up to 70% of any tax (100% if they think the taxpayer has concealed the deliberate act). 

In addition to the financial costs, deliberate tax defaulters can now find unwanted fame by being included on a quarterly name and shame list published by HMRC. In the absolute worst case of fraud, the taxpayer can go directly to jail, no passing go and no collecting £200…

Even where nothing has gone wrong there can still be considerable professional costs in dealing with HMRC enquires.  WR Partners offers tax fee insurance to our clients which gives peace of mind knowing that, if the dreaded day does arrive, any costs are covered, and our clients have access to our wealth of experience and insights in dealing with enquiries.