ExEcutivE REPORt
HMRC knows (almost) everything
Every year, HMRC estimates the difference between what it thinks it should collect in tax and what it actually manages to collect. Adam Bernstein reports…
C
alled the ‘tax gap’, the latest estimates for 2020-21 put this figure at £32bn.
According to Helen Thornley, a technical officer at the Association of Taxation Technicians, the gap comprises different factors, from fraud to differences between HMRC and taxpayers on how each thinks the law operates. The gap includes those entirely outside the tax system and ‘moonlighters’ who don’t fully declare their income.
To ensure taxpayer observance, HMRC carries out a range of compliance activities. In figures that Thornley cites, during 2021-22 HMRC launched 265,000 investigations which yielded an extra £30.8bn in tax. “These figures were lower than usual due to Covid which restricted HMRC’s abilities to carry out as much compliance work as staff were redirected to other roles,” she says.
What does HMRC know? Most people are aware that HMRC can carry out enquiries into their tax affairs, although the risk of a random enquiry is perceived as low. However, HMRC has access to an enormous amount of information that allows it to make more targeted enquiries where what a taxpayer has declared doesn’t fit with the information it has.
Thornley tells how HMRC either automatically receives, or can request information from third parties, including banks and building societies and financial institutions, as well as other government bodies such as HM Land Registry, Companies House and DWP. It can also request data about sales or income from popular online marketplaces.
And as she comments, “Because of information exchange agreements with other countries, HMRC also automatically receives information from banks and building societies held by UK residents in overseas accounts.”
Apart from raw data, HMRC also gets information directly from whistle-blowers, including unhappy business partners, spurned ex-spouses/partners, disgruntled employees and jealous neighbours.
However, Thornley cautions that “since 2010 HMRC has had access to powerful data analysis software called CONNECT, which helps match information from multiple sources to taxpayers and identify patterns or anomalies which need to be investigated.”
‘Nudge’ letters So, using information obtained from automatic data exchanges, and with the help of CONNECT, instead of a specific enquiry into an individual, HMRC often now starts by issuing a standard letter to a number of individuals or businesses that have been identified as potentially under-declaring tax. In Thornley’s view, “these ‘one-to-many’ letters act as a cue for taxpayers to review their tax affairs and take appropriate action.”
Thornley makes the point that individuals should not ignore these letters: “It is important to read the letter carefully to see what action is needed and take appropriate professional advice on how to respond, as HMRC will normally want taxpayers to confirm that they consider their tax position is correct. If no action is taken, or HMRC does not accept the response given, then HMRC may move on to open a formal enquiry.”
Coming clean If a taxpayer knows that they have undeclared income, the advice to seek professional help and get in touch with HMRC to declare and pay the tax as soon as possible.
Thornley details that penalties are calculated as a percentage of the underpaid tax and can be anything from zero to 100% - or over 100% for offshore income or gains. “Penalties,” she says, “will be lower where
the taxpayer voluntarily comes forward to HMRC and if the taxpayer is cooperative. Taxpayers are scored on how much they ‘tell, help and give’ to HMRC during the enquiry. The highest penalties are therefore reserved for uncooperative taxpayers who had sought to conceal their income.”
Another consideration is the need to look back. Where income has been under declared as a result of an innocent error then, broadly, any returns ending no more than four years ago will need to be corrected. This can be extended to six years if the understatement was careless, and up to 20 years if the understatement was deliberate.
Thornley caveats this: “It is important to check that undisclosed income doesn’t have a wider impact; there may also be tax consequences over more than one tax – for example, a business which has not declared all of their sales will not only have paid insufficient income tax or corporation tax, but they could also have under-declared VAT – or missed that they should have registered for VAT.”
In summary Once there’s a suspicion of under-declared tax, taxpayers should act quickly to correct their position with HMRC. In the long run, this will be the most cost effective, and least stressful approach. n
12 Executive Hire News - July/August 2023
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