Targeting the tax gap

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In the latest UK200Group blog post Paul Hawksley, Partner, TWP Accounting details how HMRC are closing the tax gap.

Paul Hawksley
The Institute of Chartered Accountants in England and Wales (ICAEW) released a breakdown of the tax gap. This shows that, of the £34 billion the taxman failed to recover:

• £3.6 billion was owed by individuals,
• £5.1 billion was owed by criminals,
• £9.7 billion was owed by large businesses, and
• £15.5 billion was owed by SMEs.

HMRC has come under increasing pressure to close the tax gap which has been evidenced by a large increase in the number of tax investigation opened by HMRC. HMRC recently revealed that one in ten small businesses is under investigation at any one time. That is equivalent to more than half a million SMEs across the UK.

As revealed in its annual reports and accounts for 2016/17, HMRC raised £28.9 billion from tax investigations. It was also HMRC’s seventh consecutive year of record total tax revenues, collecting a total of £574.9 billion – £38.1 billion more than the previous year. One of the main factors for this increase is due to the use of its ‘CONNECT’ software, which trawls potentially billions of items of data from many sources and matching it against information provided on a tax return and identifies potential discrepancies. The ‘Connect’ system is scouring vast databanks to unearth discrepancies between taxpayers and businesses, income, assets and transactions. However, sometimes they may not be correct and select the wrong targets. Since 2008, billions of pounds worth of extra tax has been clawed back and the reach of ‘Connect’ is ever growing.

Why might a business be investigated?

If you have received a letter to inform you that you are being investigated by HMRC, it is most likely that something about your tax returns has flagged up your business to HMRC.

You may have seen a significant reduction in your tax payments from the previous year or you might have started claiming a tax relief that is unexpected for your type of business or if you have been trading for a long time.

It is also worth mentioning that HMRC may have decided to launch an investigation into your business on a whim. According to an ex-tax inspector, around 7% of tax inspections are done randomly.

Whatever the reason, if an investigation is triggered, you need to make sure that your business is ready for a prolonged period of scrutiny.

Reducing the risk of enquiries

Here are our top 5 tips on how to reduce the chances of being investigated by HMRC:

1. Avoid Omissions
As HMRC is obtaining data from a variety of sources such as banks and the land registry, it should be ensured that omissions are avoided as these will be easily picked up by Connect. A careless omission from a tax return of taxable interest can attract interest from the Revenue and we see a number of enquiries being launched as a result of this information held.

2. Keep good records
This is where most of your “evidence” will come from, should you need it. Keeping a track of all of the purchases that your business makes along with records of all your other income and expenditure will help give a clear picture of your tax affairs to an inspector.
Make sure that your records are spotless. If they contain a single piece of false or incorrect information and that is found out, then the overall veracity of your accounts will be thrown into question and the taxman may wish to dig deeper.

3 File returns and Pay your taxes on time
A good way to trigger a HMRC investigation into your taxes is to constantly pay them late. If you are always sailing close to the wind with deadlines then there might be a red flag next to your name in HMRC’s database.
You can avoid this by working with your accountant to make sure that your bills are paid in full and on time.

4 Stick to the straight and narrow
If you try and “game the system” then you will almost certainly be caught out. Beware of any opaque “loophole” being flogged to death by someone trying to sell you their consulting services.
If you are actually breaking the law using one of these schemes then you can expect to be caught and subsequently punished.

5 Explain any changes
Often, there will be a legitimate reason that the amount you pay in taxes goes down. You may have done your own books for years and recently taken on an accountant who has claimed for a lot more than you did in previous years. It may have been a difficult year for sales. Alternatively, you’ve sold the same amount of goods and services as before but your costs have soared. There is space within a tax return to make a disclosure of such events in order to provide information to HMRC which may eliminate the need for an enquiry.

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