Humans are pretty bad at assessing risk. We’re terrified of the things that are actually very unlikely to happen (such as plane crashes and power station meltdowns) but are relatively blasé about things that are statistically more likely to harm us, such as unwashed lettuce.
When it comes to tax evasion, many people do it because they think what’s the chances of HMRC choosing to investigate their business over the hundreds of thousands that are in operation?
The truth of the matter is that HMRC is getting better and better at tracking down those who are trying to cheat the system. In 2017-18, they collected £30.3 billion through compliance activity. They now have many more trained investigation specialists who are using the latest technology and information at their disposal to launch campaigns and taskforces to maximise tax revenues.
HMRC’s Connect System currently selects nine out of every 10 enquires and is designed to identify those who may have paid too little tax. Even if you’ve done nothing wrong, anyone can be selected – meaning no one is immune to scrutiny.
Why do people try to evade tax?
In 2017, the Government published a report called ‘Understanding evasion by small and mid-sized businesses’. The authors interviewed 45 people known to have engaged in deliberate tax evasion in an attempt to get to the bottom of what made them risk it.
It found that tax evaders cited a range of reasons for withholding tax including:
- They thought the risk of getting caught was low and assumed evasion would be hard to prove even when suspected
- They thought that any fine they did incur would be outweighed by the financial benefits of bending the rules
- Others were emboldened by a belief that “everybody does it, and nobody cares”
- Some even thought they would be able to talk their way out of prosecution
What are the chances of HMRC investigating my business?
There are no concrete figures on how likely it is that a business will be investigated because the Revenue guards this information closely. It doesn’t want people to know exactly how likely an investigation is or what the triggers might be. The fact is, as with most law enforcement, its work depends on the fear of being caught as much as on actual prosecutions.
There are some statistics that HMRC is willing to share however which gives a sense of its activity:
- Since 2010, it has secured £185 billion in extra tax through investigation and prosecution
- It’s successful in more than 90% of criminal cases it brings to trial and in 2018, secured more than 830 criminal convictions for tax and duty fraud – more than 80% of those charged
- Since 2010, HMRC investigations have resulted in more than 5,000 individuals being criminally convicted
Of course there’s no way to know what percentage of people who evade tax or duty is represented in those figures, but it’s clear that it’s by no means a risk-free way to operate.
In recent years, compliance with IR35 legislation has been a particular focus for the Revenue, as the Government has sought to crack down on what it perceives as ‘disguised employment’ among contractors and freelancers.
The cost of an investigation
Apart from any penalties received for failing to pay tax, (and even if an investigation finds that your tax returns are complete and accurate after all), the process can be expensive, time-consuming and stressful.
The length of the investigation and the number of individual queries from inspectors is beyond your control, or that of your accountant. It’s not uncommon for them to roll on for more than a year and cost thousands of pounds.
Tax investigation insurance packages are available to help cover the costs of unexpected and prolonged probes and can help soften the blow.
PKB’s Tax Investigation service can help you
Our Tax Investigation Service enables us to defend you in the unfortunate case that you are selected for an enquiry, without you having to worry about the cost. We are confident that the service delivers the most comprehensive protection against any potential fees arising from professional representation in the event of an HMRC enquiry.
- Respond to HMRC on your behalf and provide you with full representation
- Handle all correspondence and meetings with the tax inspector
- Deal with the tax authorities and prepare and defend your case in full
- Give you peace of mind that professional representation costs are covered
- Provide you with access to a business legal helpline which is available 24 hours a day, 365 days a year
What triggers an investigation?
HMRC doesn’t publish a list of behaviours it’s looking out for because it doesn’t want to give would-be evaders ideas for disguising what they’re up to.
It’s generally acknowledged however that there are certain red flags including:
- High variation in turnover or profit from year to year
- Consistently paying little or no tax
- If your business is substantial and profitable but you are still managing your own accounts rather than working with an accountant, that can also raise suspicions
- Anything that seems out of the ordinary or out of step with the norm for your sector or region can trigger an investigation
There are also a number of random circumstances which may lead to an investigation including:
- HMRC is targeting a particular geographical area
- You work in a profession or trade that HMRC has decided to pursue
- You could even be selected entirely at random by the click of a mouse
Supercomputers and whistleblowers
When it comes to spotting potential tax evasion, HMRC is now better equipped than ever. Since 2010, it has used a powerful data analysis system called Connect to pull in and cross-reference vast amounts of information on taxpayers.
It uses data from other government agencies, such as the Driver and Vehicle Licensing Agency (DVLA) as well as online auction and car trading websites to identify anomalies.
Putting all that data together might for example, highlight someone reporting minimal profit from a business in a generally profitable sector, while at the same time whizzing about in top-of-the-line sports cars.
On the other hand, many investigations are the result of something distinctly less high-tech: tip-offs from disgruntled neighbours, friends, relatives or employees. In 2017/18, HMRC’s tax fraud hotline received 40,000 calls and more than £340,000 was paid out in rewards to informants.
Making Tax Digital
One of the motivations for the rollout of Making Tax Digital (MTD) is to make business accounts more transparent.
MTD will make it compulsory for businesses to keep their accounts using software rather than on paper. The first stage of MTD, covering VAT, kicks in from the 1 April 2019 and applies to businesses with a taxable turnover above the VAT-registration threshold of £85,000.
Although there won’t be any requirement for businesses to submit details of every single transaction to HMRC on a real-time basis, they will be obliged to record them and may be asked to hand over those more detailed records in the event of an investigation.
There will also be an option down the line for businesses to voluntarily submit more detail. Will businesses look as if they have something to hide if they don’t do so? That is certainly a possibility.
What to do if you’re worried about a tax investigation
If you’re worried the way you’ve handled your tax affairs in the past hasn’t been quite above board and you want to clear your conscience, the first thing to do is talk to someone.
HMRC advises those who have failed to declare income or pay tax on it, to make full disclosure to them at the earliest opportunity.
Depending on the size and complexity of your disclosure, talking to your accountant can considerably reduce the stress. We will help you work through the issue and pin down the numbers and we can counsel you through potentially difficult conversations with HMRC.