While she was the shadow chancellor, Rachel Reeves announced a policy to invest more in tax compliance, with an investment of approximately £555 million. This funding was to ensure that HM Revenue and Customs (HMRC) had the resources to recruit more inspectors. Fast forward to the Autumn Budget, Ms Reeves unveiled further details. The Labour government aims to raise an additional £6.5bn by the end of this Parliament. The Chancellor, as she stated, will “take on the tax dodgers.” In short, HMRC plans to increase the number of tax investigations.
How is the government closing the UK tax gap?
The government believes it can close the “tax gap” as follows:
- Closing tax avoidance which leads to a 4% loss
- Tax evasion accounts for 19% of the tax gap
- Taxpayers failing to take proper care results in 30% of the tax gap. This is the biggest number by far and one that is concerning.
HMRC plans to hire 5,000 additional compliance staff and 1,800 debt officers to conduct more thorough investigations into your tax affairs. However, the training of these new officers will take time, which may lead to longer delays in the investigation process.
A good example of this recently has been the increase in investigations for Research and Development (R&D) grants. Untrained officers have been issuing blanket rejections of claims, forcing many businesses to lodge appeals. These appeals take time and effort.
How does HMRC deal with errors and omissions?
Whilst we think in the long run HMRC plans to increase the number of tax investigations, they almost always will start with a “nudge” letter.
These “nudge” letters are there to give taxpayers an opportunity to come forward with any omissions or re-assess the information that is already provided.
Whilst these letters are not a full investigation, 90% of the time they will incur costs to respond in an appropriate manner. If your accountant is involved it means more of their time and more fees.
An example is where the “nudge” letter led to an increase in the hours spent providing full disclosure of an overseas asset. However, this resulted in no additional revenue for HMRC but incurred £1,000 in accountancy fees.
In a case like this, an insurance product if taken up by the client would mean our fees are covered and it does not cost the client a penny. This type of insurance is offered to all our clients where we are preparing tax or VAT returns or processing the payrolls.
As a valued client, if you haven’t taken advantage of this coverage yet, now is the perfect time to do so. The investigation landscape is evolving due to important government announcements and intentions. Being proactive will ensure you’re prepared for any changes ahead.
What happens if you get a tax investigation?
As we have already discussed HMRC plans to increase the number of tax investigations to close the tax gap. There is no one answer-fits-all as to why you should be investigated. There are however lots of possibilities such as:
- Late filing of tax returns
- Errors in the past that required corrections
- Late payment of tax
- Dealing in a cash business
- Having say a routine VAT inspection resulting in other taxes being investigated
- Working in a targeted business sector
It is worth noting that HMRC looks favourable towards those taxpayers who employ an Accountant to deal with their compliance. That way “proper care” is expected.
HMRC investigations can run into thousands of pounds in costs. Having fee protection insurance gives you peace of mind that your accountant’s costs for handling the investigation will be covered.
If you do not have an accountant, you will not have access to investigation insurance. This means that you cannot protect yourself against any costs related to professional advice if your case is selected by HMRC and you need to employ an accountant.
What next
If you are a client and have not taken out the insurance cover we offer but would like to talk to someone, then please email Katherine Wilson here and she’ll be able to help you.
Should you have concerns about your tax affairs, business or personal please email your normal manager at Myers Clark. If an error or omission has been made, it is always better to go to HMRC first. It works out much better when it comes to fines and penalties.
If you are not yet working with us here’s how we can help you with your tax
On a last note. Did you know that small businesses are believed to account for 56% of the tax gap? In comparison, larger businesses and criminals each represent 11%, while the very wealthy makeup about 5%. This is according to data released by the Treasury.
So, if you’re a small business owner, don’t let yourself be an easy target! Team up with a professional accountant and consider getting some solid tax enquiry fee insurance to keep yourself protected.