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The true value of HMRC investigations

19th Jun 2012
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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.”

General Amnesty

Mannion reckons that a general tax amnesty would be more effective and fairer than mini amnesties for different industries.

The House of Commons Treasury select committee report also reckons that a general tax amnesty is worth considering but the government has ruled out this option.

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”.

Heavy Handed

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?

Replies (21)

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By Trevor Scott
19th Jun 2012 18:31

I'd like to know....

...why HMRC doesn't act upon information within reports of suspicious activity. What is the point of placing such a legal duty upon financial professionals, I will ignore the time/cost/bother, when the information disappears down the government's black hole? 

The government has information and evidence of real (not hypothetical) tax evasion, checked and reported by financial professionals, and isn't acting upon it...yet it claims to be keen on targeting tax evaders!

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Replying to johnjenkins:
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By frustratedwithhmrc
20th Jun 2012 11:28

Lets persecute the registered business and ignore true evaders

Trevor Scott wrote:
...why HMRC doesn't act upon information within reports of suspicious activity. What is the point of placing such a legal duty upon financial professionals, I will ignore the time/cost/bother, when the information disappears down the government's black hole?

As usual with legislation passed by recent governments it is the impact of the 'Law of Unintended Consequences' coming into play. HMRC has barely enough staff to keep its own systems and processes operating.

Local offices and local inspectors used to be in a good position to investigate incidences of potential evasion and deal with tip-offs (usually from disgruntled wives, girlfriends and former business partners) in a swift and efficient manner along with their returns workload.

With the move towards greater automation, staff reductions, closure of local tax offices and movement of remaining staff to regional offices, the mechanism for dealing with tip-offs is less effective.

Rather than a visit from a hob-nail booted inspector catching a tax dodger in the act, it is now more likely that only an investigation will be triggered within the IT systems, with the first move being a letter requesting information.

This gives the evader time to hide or disguise the evidence before a physical inspector steps in, weeks or even months after the initial tip-off.

In addition, the Money Laundering Regulations have been written in such vague terms (to the majority of tax professionals anyway), that far more MLR Reports are made based upon little more than suspicion, just to avoid accountants being subject to censure. With so much 'noise' how can anyone reviewing these MLR's separate the wheat from the chaff?

No - HMRC is going in the wrong direction and is still accelerating, towards an IT and process based future which will make cash-in-hand and unregistered business-type tax evasion easier.

Certainly the targeted approaches discussed in the article raise some revenue from those REGISTERED individuals who are caught, but it does little to catch the UNREGISTERED evader unless he/she decides to come clean of his/her own volition.

 

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Replying to barrym2004:
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By Jekyll and Hyde
20th Jun 2012 11:20

Wrong direction, wrong management, wrong intentions!

frustratedwithhmrc wrote:

No - HMRC is going in the wrong direction and accelerating towards an IT and process based future which will make cash-in-hand and unregistered business-type tax evasion easier.

Certainly the targeted approaches discussed in the article raise some revenue from those REGISTERED individuals who are caught, but it does little to catch the UNREGISTERED evader unless he/she decides to come clean of his/her own volition.

 

I completely agree with frustrated.

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Replying to johnjenkins:
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By Court Tax Investigations
20th Jun 2012 14:10

Gov't Black Hole

I fully agree. Just after the Money Laundering Regs came in we had a client who sold flights to Russia on the internet. In their first year they turned over several million which was suspicious in itself. We discovered that very large sums of money were being sent to Russia and then a large proportion of this money was recycled into undeclared offshore accounts in the names of the Directors. Money Laundering in its true sense. A report to Soca and HMRC was submitted.

What happened? NOTHING.

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Replying to Flying Scotsman:
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By AddsUP2Me
20th Jun 2012 15:34

Inaction on large scale fraud?

Court Tax Investigations wrote:

I fully agree. Just after the Money Laundering Regs came in we had a client who sold flights to Russia on the internet. In their first year they turned over several million which was suspicious in itself. We discovered that very large sums of money were being sent to Russia and then a large proportion of this money was recycled into undeclared offshore accounts in the names of the Directors. Money Laundering in its true sense. A report to Soca and HMRC was submitted.

What happened? NOTHING.

 

That is appalling. Is there any possibility that there was a reason for that? Could they have investigated and it just not been made public? Did you consider making a second report, or follow up report advising that no action had been taken?

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Replying to DJKL:
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By Court Tax Investigations
20th Jun 2012 16:46

Inaction on large scale fraud?

They would have required original documentary evidence held by ourselves and statements. We kept the client for a further year to see what happened before telling them to go elsewhere before the next set of accounts were due. I do not see it as part of our function to chase up the inefficiency of major government departments - we do too much of this unpaid stuff as it is.

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Replying to lionofludesch:
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By AddsUP2Me
20th Jun 2012 17:03

Good point.

True. When people try to sort the world out, they will inevitably get stressed and let other people down. You can only do what is reasonable. 

I wonder if they got rumbled further down the line.

You have a very good name Mr Court. It has a dual function in the name of your business.

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By B.R.
20th Jun 2012 11:24

Clamp down on hotels.

HMRC are poised to strike at the heart of the tax evasion industry with a shake up of the hotel sector! Yes, yet again some bored civil servant has produced a report that what we need is a clamp down on hotel staff who, after working a 12 hour day with one break, augment their minimum hourly rate pay with a few pounds in tips from thankful customers! And while we're at it, lets see if any staff have use of a bedroom for the night without deduction from their pay for the BIK - the fact that they will go to bed at 1.30am and rise at 6.00am to commence breakfast service is irrelevant - after all, the BIK is technically leviable even if the room is used for only a minute! 

Yes, thank goodness we have such titans directing operations at the Revenue - we can all sleep easy in our beds - as long as we're not overworked hotel staff.

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By Ian McTernan CTA
20th Jun 2012 11:33

Staff Training

Having dealt with a lot of enquiries over the years (others pass them to me to deal with), I find that the main sticking point in many an enquiry is the inflexibility of the investigating officer- once they start a case they will stick to every single point regardless of the evidence presented to them.

There also seems to be a lack of review/control, with most officers sending out and dealing with cases without any sort of review from line management at all.

A little bit of common sense and experience of working in the real world, rather than the ideal dream world that seems to be taught to them (perfect records, receipts for everything, etc) and I reckon they could deal with five times as many cases and vastly increase yields too.

Maybe a requirement that all enquiry officers have at least one year's experience working in a small practice (although who would actually want them seconded to their offices...) or in a real business would go a long way to altering their perceptions and making them realise what it is like to run a business on the sharp end.

A little bit of compromise (from both sides) and small cases could be closed faster with a decent yield and less costs all round.

I applaud the targeted taskforces idea, which should not be tied down with a target of revenue to be raised- mainly because the knock on effect yield can't be measured and so makes wasting time trying to count it pointless.

Less stats more work- something that should be drilled into all public sector workers.

One other thing that never seems to occur to HMRC- why not ask us small practitioners which areas they should focus on, or even employ a few of us as consultants to tell them what to look for, or even employ a few of us to take a look at small cases that have dragged on and suggest solutions rather than continue to tie up resources.  Do a pilot project- I'd be happy to provide my services at a reasonable cost.

 

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By The Black Knight
20th Jun 2012 11:29

Marginal cost

Someone should explain marginal cost to HMRC.

 

If it costs you an extra 10p to collect an extra £ 1.00 then you should invest more 10p's

Can I make it any simpler.

Unfortunately the cost of an enquiry will use an absorb as much cost as we can method in the calculations just the same as the police and the army making the figures meaningless so that the wrong decisions are made. Q.E.D

HMRC fail in their task because

1. They fail to use information (intelligence) available to them.(perhaps do not understand it either)

2. Have a lack of investigators and or good ones

3, Have an internal attitude problem

4, Have failed so miserably over the last 15 years that no one takes the threat seriously.

5, Even when so called targeting the results show that really a scatter gun approach was used

Simples

If only I was on commission....but they can't listen to me because they have an attitude problem.

We still see them pick the wrong cases and loose just as they have always done.

 

 

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Replying to Carl London:
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By frustratedwithhmrc
20th Jun 2012 11:35

Understanding Pacesetter - More important than understanding tax

It must be understood that in the modern process driven HMRC you are more likely to be promoted due to your knowledge of HMRC's Pacesetter methodology than knowledge of taxation.

This is why HMRC has only one member of the executive team with an established background in tax and that is the flawed Dave Hartnett who retires at the end of this month.

This is why HMRC is broken and getting worse.

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By KenKLM
20th Jun 2012 11:33

Tax evasion - 2 fold issue

Dear HMRC ,

Please take a keen interest in "cash" businesses that appear to be paying the NMW to employees ; particularly identifying those supposedly working 16 hours a week upto 5/4/2012 and have suddenly jumped up to 20 hours a week for the current year ( the tax credit criteria ) . It will be easy to identify these from PAYE EOY returns and a subsequent simple telephone enquiry of the employer . High chance I think that some employers are paying a balance of wages in cash , thereby under-declaring VATABLE takings and not stopping PAYE and the recipient is causing a 2 fold evasion by being able to top up their income with fraudulently claimed tax credits . Restaurants , cafe's , shops ... have to be high risk areas and frankly , I am fed up of people bragging about businesses they know working the system -which is too easily defrauded !

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Replying to tom123:
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By The Black Knight
20th Jun 2012 13:01

thank you

KenKLM wrote:

Dear HMRC ,

Please take a keen interest in "cash" businesses that appear to be paying the NMW to employees ; particularly identifying those supposedly working 16 hours a week upto 5/4/2012 and have suddenly jumped up to 20 hours a week for the current year ( the tax credit criteria ) . It will be easy to identify these from PAYE EOY returns and a subsequent simple telephone enquiry of the employer . High chance I think that some employers are paying a balance of wages in cash , thereby under-declaring VATABLE takings and not stopping PAYE and the recipient is causing a 2 fold evasion by being able to top up their income with fraudulently claimed tax credits . Restaurants , cafe's , shops ... have to be high risk areas and frankly , I am fed up of people bragging about businesses they know working the system -which is too easily defrauded !

Thank you for your letter, and bringing this matter to our attention. At this time we are unable to comment on individual cases. May we remind you that it is the taxpayers responsibility to file the correct figures.

Thank you and goodbye!

regards

HRMC

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By Eric Robinson
20th Jun 2012 11:35

It is true that a massive amount of local knowledge has been lost. It is also true that a similarly massive amount of experience and expertise has also disappeared due to the job reductions that accompanied the withdrawal of HMRC from numerous locations.

No doubt, the campaigns also have a deterrent effect that cannot be measures in hard cash but the lack of variety in terms of coverage will mean that addressing certain types of non compliance remains under resourced.

The investigator's intuition and recourse to sound third party information has been replaced by processes that have variable merit. 

 

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By trecar
20th Jun 2012 11:39

Catching the unwary

What we are not hearing about is those caught up in the net who have not indulged in tax evasion but are getting caught with some pretty savage assessments and costs on a vague suspicion. I wonder how the costs incurred marry up against the tax recovered. It could well be another side of the coin that does not get measured. Also what is the cost in lost management time, missed business opportunities etc.?

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By Roland St Clere-Smithe
20th Jun 2012 11:40

Easy targets again

 

As usual they pick on easy targets who they can bully by their heavy

handed hob nailed boots approach. They should be takling the crime

syndicates , some of whom are rumoured to be richer than the Queen,

tax avoidance schemes like K2, patronised by hypocrites like Jimmy Carr,

and the likes of Vodafone and Goldman.

They won't of course as they are too gutless to do so.

What's worse is that their complicity in allowing tax avoidance on a

massive scale is accepted through white washed reports exonorating

their settlements policy. Its shameful!

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By david - chandlers ford
20th Jun 2012 13:06

TAX GAP

I believe HMRC overestimate the "tax gap" under pressure from the ministers who cannot balance their budgets !!!!  They think there is "magic money" out there and the reason the budgets do not balance is down to HMRC failing to collect it.  There is less tax out there than they estimate &  the REAL criminals are too cleaver for them anyway !!! 

How about a "thank you" to honest taxpayers ???????

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By Simon Sweetman
20th Jun 2012 13:10

K2

Fair's fair. From today's news it appears that HMRC is investigating K2 and has been doing so for some time.

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By ireallyshouldknowthisbut
20th Jun 2012 13:49

I think Hopkins is bang on, the level of competence of staff in investigations in recent years seems to be dire, which leads to a lot of arguing about really stupid things, and missing huge areas in which they could pursue a legitimate claim.  This wastes a lot of our time and their time too.

One of the worst time wasters all round is the 3 months plus to respond to a letter, which results in a huge amount of time re-reading the file for both sides, not to mention passing the files around between different members of staff so all the history is lots and each person has to start afresh.  If letters were responded to in commercial timeframes the result would be far less work on each case as it would be fresh in everyones mind.

On the staff themselves many seem to have very narrow knowledge, no history of previous tax laws which might be relevant to a long running case and above all no ability to have a rational conversation about the client. Basic understanding of things like bookkeeping is just not there. 

If it was me, I would get myself a team of very experienced accountants from industry, pay them top whack get them to run the department on commercial lines and watch the money flow in.

 

 

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By The Black Knight
20th Jun 2012 14:21

Disgrace!

Clearly SOCA (the Serious and Organised Criminals Association) are on the payroll.

It is a DISGRACE!

 

 

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By mikefleming3028
29th Jun 2012 09:39

Court Tax Investigations

I agree with the sentiments expressed BUT---

This is a public forum and in my view Mr Court has breached the Money Laundering Regulations under the Tipping Off provisions. At the very least Accounting Web should redact his responses and Mr Court should report himself to his MLRO.

Apart from anything else the client looked like he was Russian!!!!!!!! say no more.

 

 

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