HMRC ENQUIRY ACTIVITY
Team Harbour Key are seeing a significant increase in HMRC compliance activity, and we report regularly in our newsletters about HMRC’s increased targeted activity, which seems to grow month on month.
Some new campaigns are summarised below
Targeted activity is generally where HMRC have received information via an information demand they have issued to, say, a trade body, which they can cross-check against individual or corporate tax reporting. Alternatively, HMRC already have access to some registers or can demand access to a registry to enable them to access the information. Online platforms/intermediary sites such as Airbnb, eBay, or building trades ratings/listings are reviewed as well as credit reference agency data and applications to mortgage providers.
Targeted activity generally involves HMRC writing to the taxpayer advising that they believe the individual or company has a source of income that they have not been reporting and asking if their tax reporting needs to be updated. Basically giving the taxpayer an opportunity to bring their tax affairs up to date.
A non-targeted approach is looking at an individual or business in isolation. The self-assessment system essentially relies on the taxpayer’s honesty to ensure that all tax due is paid. However, as a back-up, HMRC carries out compliance checks/enquiries on a proportion of returns to ensure that the correct amount of tax has been paid. Its opening paragraph in its guidance advises:
“HM Revenue & Customs (HMRC) has a responsibility to ensure that individuals and businesses are paying the correct amount of tax or claiming the right amount of any HMRC benefits, for example tax credits. HMRC needs to make sure that everyone meets their responsibilities, so they carry out compliance checks – sometimes referred to as enquiries, investigations, inspections or assurance visits.”
Despite its name, a compliance check is a formal HMRC tax investigation. In commencing a compliance check, as per the guidance above, HMRC will be checking various matters, for example, whether a tax relief claimed on the return is correctly claimed or they may have a particular reason to suspect that tax has been underpaid. These are on the increase!
The reason for an enquiry will generally fall into one of the following three categories:
- Where some figures on the tax return do not match with other information HMRC has at their disposal. The ability of HMRC's Connect database (HMRC sophisticated artificial intelligence software system) to identify links between businesses, shareholders, properties, families and across different government departments is increasing in its sophistication such that anyone who has not declared all of their income could become subject to an enquiry; the majority of cases (over 90%) are initiated by information and analysis generated by Connect.
- A late submitted return (enabling a longer enquiry time), or
- HMRC has received a 'tip off' from another taxpayer, another Government Agency or via some other HMRC team.
The areas we are seeing HMRC look at:
As with any business expense, it has to be wholly and exclusively for the business. HMRC are having a good look at sponsorship, an area they feel can be abused. When allowing sponsorship costs for tax purposes, it has to be shown it has a benefit to the business, for example it advertises the business or brand, and is not a personal benefit for the owners. For example, if the business owner decides to pay for the team kits for their child’s Sunday morning football team, HMRC are highly likely to be successful in challenging the tax allowability of the expense, arguing no benefit to the business, when less than 20 people attend the games, all of whom are parents and not likely potential customers anyway. In the main the cost has been incurred to benefit the son.
The starting position for HMRC when looking at travel expenses is whether they are being claimed correctly. Travel expenses can be claimed where a valid business journey has been undertaken and it is not ordinary commuting. It is possible to have two places of work, one of which could be your home, but if you regularly travel to an office or customers premises to work, then this second location can also be a place of work and therefore becomes ordinary commuting and not an allowable expense. In a recent enquiry into one of our client company’s corporation tax returns, it was discovered that one of the directors regularly travelled from their home (which was what the director took to be their place of work) to a customer’s offices, twice a week, every week and generally on the same days, with HMRC determining the customer’s address was a place of work, and the costs disallowed for tax.
One of the first items HMRC will ask for as part of looking at business mileage is expense claim forms or a business mileage log. What we sometimes find at this point is that there is no mileage log, and the claim is simply an estimate. Again, we have experience of this area, if HMRC succeed in disallowing the costs or a significant part, as having been incorrectly claimed, together with no supporting mileage log, then HMRC will award a significant penalty for not taking care, or even determine there was negligence (attracting a higher penalty). The most serious behaviour attracts a penalty of 100% of the tax lability.
HMRC has begun winding down its Taxpayer Protection Taskforce, with the objective to have completely closed by September. Although the specialist team is being closed, HMRC’s interest in Covid crime continues to recover money from fraudulent claims.
Home as Office
Where someone is required to work from home as part of their employment contract, or they run their business from their home, a tax deduction can be claimed for use of home. The claim can either be using a fixed rate set up by HMRC, or taking the actual costs incurred and applying a sensible formula to allocate some household costs to the business. HMRC during the Covid-19 pandemic, HMRC were generous in their treatment of the relief for working from home but they have stated earlier this year, they will be looking at this area in more detail, as they believe the relief is being abused, for example claiming when not working from home.
Business Asset Disposal Relief (“BADR”)
BADR is a capital gains tax relief where business owners who sell their business, or shares in their company (subject to meeting the qualifying conditions), can claim a 10% capital gains tax rate (as opposed to 20%) on the first £1m of the chargeable gains. The rules changed in March 2020, just before the Covid lockdown and many people missed the changes, one of which was reducing the lifetime allowance from £10m to £1m. The total amount of BADR an individual can claim in their lifetime (from the date the 10% tax rate was introduced, 2008) is £1m. HMRC are aware that individuals are not up to speed with the rule changes and are able to check back quite simply on their system to see how much of the £1m allowance has been used.
Research & Development Tax Credit Claim
We have flagged over the last few months the changes in both the rules and the increased scrutiny of R&D claims. More information can be found in our April newsletter main article.
The increase in HMRC compliance activity makes a good case for considering taking up tax investigation fee insurance, which covers against the professional costs of dealing with an HMRC enquiry, provided Harbour Key have completed the work under enquiry. We can arrange cover with Professional Fee Protection Limited.
Should you wish to take advantage of our tax investigation fee insurance, please do not hesitate to call us on 01452 713277.