HMRC believes that 50% of the estimated tax gap (£40 billion) is attributable to the small and medium sized business sector. The “tax gap” is the difference between the amount of tax HMRC actually collects and the amount it estimates is due.
We have reported previously on new steps, initiatives and measures HMRC have and are taking to target to the tax gap, such as:
increasing record inspections – business record inspections are up 60% over the last 12 months;
tax amnesties for specific sectors – Since the 2010 spending review HMRC has launched 40 specialist taskforces aimed at extensive investigation into businesses and individuals. These have raised over £60 million;
HMRC have recruited 2,500 new compliance officers.
The number of people being investigated by the taxman has doubled in one year, raising concerns that people who have made innocent mistakes are being targeted by the Government. HM Revenue & Customs made inquiries about the tax affairs of 237,215 people last year, compared with about 119,000 in 2011-12. The number of self-employed people investigated has quadrupled in that time while annual prosecutions have risen sevenfold in three years.” Daily Telegraph 16 May 2014
It is reported that HMRC has set itself a target of delivering an extra £7 billion a year by April 2015. HMRC has admitted that two-thirds of the 800 biggest businesses operating in the UK are under enquiry, however the majority of the target tax will be from small and medium sized businesses, through increased risk assessment of potential tax evasion and avoidance, compliance checks and enquiries.
Our own experience at Harbour Key shows that HMRC are being smarter in their use of IT systems which cross check information they hold, other Government agencies and using third party sourced information. For example, HMRC receives details of all interest paid on UK bank and building society accounts in the UK, which it is now checking against interest figures declared on tax returns. In a case we came across, a client had forgotten about one particular account and had therefore not declared a small amount of interest; HMRC picked up this omission from third party records and a general enquiry into their affairs ensued.HMRC’s new approach is, rather than opening a general enquiry, they undertake a review of the business records. If the review indicates poor record keeping or some other sign of accounting weakness, then an enquiry will be opened. Common areas for challenge are as follows:
Dual business/private expenditure; for example, motor car use or telephone landline use, where the Inspector challenges the basis on which the business and personal use split has been calculated;
Poor expense claim details and review process; Valuation of goodwill if a business has been incorporated into a limited company;
Valuation of property on transfer to shareholders/pension funds or dividends in specie.
Any successful challenge to reduce the business element or increase a valuation means extra revenue for The Treasury. It may not be a great deal of revenue by itself, but will be when aggregated with all the others. The additional tax to pay may or may not be a large sum, but even if not the main issue for the individual taxpayer is the time it takes and the cost in dealing with the enquiry. The cost of professional fees dealing with an enquiry can be significant, as an enquiry can go back a number of years and some take a significant amount of your time and effort to settle.
With HMRC’s increased activity, taxpayers should consider tax investigation fee insurance. For a one off annual payment, the taxpayer advisors costs for dealing with the enquiry will be covered by the insurance. Business/individuals should first check to see if tax investigations are covered by any existing legal expenses/business insurance package they have in place. Secondly, check to see if you are covered through membership of a professional organisation; for example, The Federation of Small Businesses currently offers tax investigation fee insurance as part of its annual membership fee.
If you or your business is not covered by an existing policy, then speak to your advisor who should be able to introduce you to an insurance provider. At Harbour Key, we can offer all our compliance clients insurance at reasonable rates to give peace of mind.
In HMRC’s dash for cash, it is prudent to consider if you need cover. Should you wish to discuss tax investigation fee insurance, please do not hesitate to contact Harbour Key.
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11 November 2014
Harbour Key Limited
+44 (0) 1242 244115
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