Businesses, directors, individuals – all taxpayers can find themselves subject to a tax investigation, on either a selective or random basis.
A tax investigation can take months to resolve. They are costly, stressful, disruptive and invasive. But they are highly lucrative for HMRC.
HMRC is becoming more effective and prolific in targeting individuals and business through tax investigations.
As HMRC seeks to increase tax revenues, we are seeing growing numbers of tax investigations.
Enhanced tax enforcement is largely being driven by ‘Connect’ – HMRC’s specialist software. Connect is being used by HMRC to analyse taxpayers’ spending and earnings, in order to identify discrepancies that trigger a tax investigation.
Use of Connect, combined with wider powers and inflated targets, means HMRC are able to identify and act on increasing volumes of cases relating to taxpayers’ financial positions. Put simply, more businesses and individuals are now being subjected to a tax investigation.
Poor handling of an HMRC tax investigation by the taxpayer can often result in a less favourable outcome, and a period of considerable stress.
Seeking professional advice early in the process will alleviate pressure on you, helping you ensure you are following the process and meeting your obligations under the tax investigation, while improving the prospects of reducing your liability at the conclusion.
Here to help
As specialist tax advisers, ETC has experience in dealing with a broad range of HMRC tax investigations and enquiries affecting individuals and businesses, including Accelerated Payment Notices (“APNs”).
If you have received notification that you or your business will be subject to an HMRC tax investigation, we can manage the effective running of the process, reducing the stress and impact on you, your loved ones and your business.
Timing and impact of your response to HMRC will be critical.
We will manage the entire tax investigation on your behalf, with a focus on minimising the risk to your finances. This includes handling all contact with HMRC, dealing with all questions and enquiries, and drafting and submitting required information. Where relevant, we are also experienced in dealing with insurers.
The process is demanding, exhausting and invasive. Taking early and decisive action, based on professional tax advice, will improve your chances of securing an outcome in your favour.
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What is HMRC’s ‘Connect’ system?
Connect is HMRC’s online system. Under Connect, HMRC is able to access extensive data relating to taxpayers. Connect enables HMRC to build a comprehensive picture of taxpayers, their finances, lifestyle, spending habits by pulling in information from a broad range of sources such as DVLA, credit reference agencies, land registry, bank accounts, and social media channels such as Twitter and eBay.
The system is used to identify discrepancies between taxpayers and businesses and their income, assets and transactions.
The impact to date of the system has been significant. Connect has already delivered £1.4bn of additional tax revenues. It is reducing the lifecycle of investigations and fuelling increases in the number of investigations taking place.
Searches can now take minutes rather than days or weeks. Investigations that prior to Connect may have been cost-prohibitive to pursue are now being undertaken.
However, the scope of searches is not necessarily equating to accuracy. Targets can still be selected and subjected to an enquiry without actual cause.
Who is being targeted with HMRC tax investigations?
Technically, all UK taxpayers can be targeted for a tax investigation, including businesses, directors and individuals.
Certain sectors do appear to be attracting HMRC scrutiny, including SMEs and HNWIs. Higher-rate taxpayers with properties abroad and people holding offshore accounts are also finding themselves increasingly under the spotlight.
Why am I being investigated by HMRC?
HMRC benefits from broad-ranging powers when conducting a tax investigation, to help them look for evidence of taxpayers living beyond declared means.
Information sharing with tax authorities across the globe through sophisticated and standardised international initiatives to tackle tax evasion is providing HMRC with critical data in profiling taxpayers.
In addition to the data gleaned from Connect, HMRC will draw on a range of sources to build a profile reflective of a taxpayer’s circumstances.
Some investigations will involve a detailed examination of a specific item on a tax return, others may extend to a full review of all individual or business affairs.
Financial reporting for example can provide clues to HMRC about the status of a business.
Do your figures fluctuate substantially between high profitably and substantial loss over successive tax years? Or perhaps they consistently show loss? Are your figures unusual when measured against your industry benchmark? Abnormalities or inconsistencies are likely to lead to further investigation.
Enquiries into other companies can also lead HMRC to you or your business. For example, if you have failed to declare some income or interest, but records exist within another business’s accounts, you may find yourself under scrutiny.
HMRC has the power to inspect business documents and assets at your premises. They can ask for documents and information, make unannounced inspections and go back up to six years to investigate matters.
Tax inspectors can operate undercover, on an individual basis or as teams, as part of their investigation. Inspectors have the power to raid the homes of people they suspect of not paying tax.
Notwithstanding improved technology and data sharing, the reliance on tip-offs and information from informers remains. Neighbours, business competitors, former spouses, disgruntled employees – HMRC will use this intelligence in conjunction with other insight when building a picture of a taxpayer’s financial position.
I have been cleared of an HMRC investigation – what happens now?
If you have been cleared of any wrongdoing or additional tax liabilities following a tax investigation, the matter will be closed by HMRC.
You will however still be liable for any fees incurred from your professional advisers incurred in the defence of the investigation.
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Retrospective tax legislation
Is the 2019 loan charge retrospective? At first glance it certainly is. One is being subjected to a tax charge that one could not have known about when the loan was taken out many years, or maybe decades, ago.
TAX INVESTIGATION ADVICE
Essential information about tax investigation.
An investigation might be purely at random or it might have been triggered by information coming to light.
HMRC now have their hands a on a powerful data gathering computer called Connect. HMRC’s powers have increased hugely over the last few years but the exercise of these powers must take place within certain checks and balances.