The true value of HMRC investigations
HMRC taskforces to tackle black spots of evasion in the UK economy have become ubiquitous since 2010, but some tax experts question their value. Nick Huber reports.
The taxman says the targeting of sectors ranging from medics and plumbers to restaurant owners and door-to-door sales people is a smart use of resources. Tax advisers broadly agree but doubt whether returns from the campaigns are worth the effort. Others think that a general tax amnesty would recoup more tax while MPs say that HMRC could collect a lot more tax if stopped making thousands of its workers redundant.
The taskforces are part of £917m in funding from the government spending review to tackle tax evasion, avoidance and fraud from 2011/12. The target is to raise an additional £7bn each year by 2014/15.
More than 20 targeted taskforces have been launched since the beginning of 2011. HMRC is planning 30 more during 2012-13.
Each specialist team will do intense research and tax investigations to uncover businesses owing tax.
The taxman says it has raised more than £500m from taskforces over the past five years (including “offshore disclosure facilities”).
The £500m figure may sound impressive initially, but it only accounts for about 2% of the estimated £35bn tax gap - the difference between the tax that HMRC thinks should be collected and the amount actually collected. Some experts think the tax gap is much higher than HMRC’s estimate.
What to do if your client is investigated by a targeted campaign
Tax advisers whose clients are investigated by one of HMRC’s taskforces should remember first principles and check that the taxman has the right person. Mistaken identity is not unknown, says Sinclair, who recalls a client with a Middle Eastern surname who HMRC investigated for potential money laundering and tax evasion as part of an investigation into a drug deal.
“Sometimes HMRC gets the wrong people,” says Sinclair, who adds that it took quite a while to prove to convince HMRC that his client was innocent and that HMRC had got the wrong person.
If the client does owe tax it’s important to make sure the client comes clean about all assets they may owe tax on – not just those targeted by the HMRC taskforce.
The amount of tax each taskforce collects varies, but is typically between about a couple of million pounds and £15m, as shown in AccountingWEB’s taskforce tracker.
The taskforces, which use software to help investigators track down tax evaders, are aimed at parts of the economy where HMRC has evidence of tax evasion. People who come clean about their financial affairs during the tax campaigns typically receive more lenient treatment.
Other tactics to tackle evasion and avoidance include tax amnesties and criminal and civil prosecutions. Offshore tax amnesties, such as the Liechtenstein Disclosure Facility, and a deal with the Swiss government to tax money held by British citizens in “secret” Swiss bank accounts are expected to raise billions and are generally seen as a success by tax advisers.
However measuring the success of the taskforces is difficult because HMRC does not give targets for how much it wants each taskforce to raise.
To monitor how these campaigns are proceeding, and the impact they are having on UK businesses and advisers, AccountingWEB has opened a new tax investigations discussion group to collect evidence from community members.
The taskforces have a number of attractions for HMRC. They are cheap to run and easy to manage. In theory, taxpayers do most of the hard work for HMRC by owning up to tax owed and fill in a lot of the documentation.
John Cassidy, tax investigation and dispute resolution partner at PKF, said the plumbers’ tax campaign had been “pretty effective”, citing a couple of criminal convictions of plumbers for tax evasion.
Money spent on tax investigations usually reaps a big return. The rough rule is for every pound that tax investigations costs 10 pounds is collected, says Richard Mannion.
Given these returns some tax experts think that HMRC’s rolling job cuts (30,000 since 2005 with plans to cut a further 10,000 by 2015, according to the Public and Commercial Services union), are misguided.
MPs have warned that the scale of HMRC’s jobs, plus poor management of IT projects, could mean that the taxman will miss targets for raising extra revenue.
Although HMRC made “substantial progress” in increasing tax yield, £1.1bn more could have been collected had HMRC not cut more than 3,000 jobs over the five-year period, the Commons Public Accounts Committee said in a report published in May.
In order to maximise returns from the campaigns (and scare tax dodgers into coming forward) HMRC needs enough investigators to follow-up leads.
“Based on hearsay the Revenue is taking a long time to follow-up on [leads from taskforce campaigns],” says Richard Mannion, national tax director at Smith & Williamson. “Tax amnesties use a self-assessment principle, but if you don’t have the resources to follow up it devalues the whole principle.”
Mannion reckons that a general tax amnesty would be more effective and fairer than mini amnesties for different industries.
The tax taskforces have predominantly affected small business. A spokesman for Forum of Private Business, which represents more than 25,000 UK small businesses, claims that HMRC’s taskforces are “heavy handed” and “wrong headed”.
The spokesman accepts that some small businesses deliberately evade tax, but says most need more support from HMRC to help ensure they pay the right amount of tax rather than a “stick”.
HMRC says that its campaigns and taskforce work are in addition to regular and ongoing compliance activity.
"Like most departments we have to deliver more for less, and we have been reducing our workforce in line with our Spending Review settlement.
“However, in that settlement an additional £917m was made available to us to tackle evasion, avoidance and fraud. This is being used to increase our tax take from compliance work by £7bn a year in 2014/15 which we are on target to do. Last year alone we increased the yield from our compliance work to £13.9 billon.”
“By focussing on front-line services and significant expansion of our e-services we are delivering more with less.”
The “honest taxpayer” has absolutely nothing to fear from HMRC campaigns, HMRC says. “HMRC have a responsibility to ensure everyone pay's their fair share in tax and that the tax rules are respected across the board."
Which profession will HMRC target next? HMRC declines to comment but Doug Sinclair, head of tax Investigations at accountancy firm Berg Kaprow Lewis, says that a clampdown on hotels may be imminent.
Why hotels? Sinclair says that the industry employs a lot of casual staff, (possibly making cash-in-hand payments harder to spot). In addition, accommodation provided for staff may be classed as a benefit in kind.
Some AccountingWEB members have posted about their experiences in the Tax Investigations discussion group, with one saying “we have had the pick of the litter in terms of motor industry/second car dealer enquiries with one ongoing and finally settled for a mere £16000 (including penalties and interest-for 2 tax year dating back to 2001/02 & 2002/03)!”
He then added: “another which has now been referred to the alternative dispute resolution service - which I would recommend - in its new form because of the stubbornness of the acting inspector not accepting available evidence.”
What experiences have you had with HMRC investigations?