HM Revenue & Customs (HMRC) is under huge pressure to increase tax receipts and reduce tax leakage. As a result, HMRC has a growing appetite for launching investigations where it considers there is a reasonable possibility of collecting under-declared tax.

Intensive bursts of compliance activity are targeting business sectors considered to be high risk, and HMRC is sharing information internally more effectively than ever before, thus increasing its chances of identifying potential anomalies in taxpayers’ affairs. “The tax authority has created dedicated common interest teams, such as a unit focused on high net worth individuals and offices which deal exclusively with large businesses,” explains Valerie Watson, Moore Stephens tax partner who has assisted many clients on tax investigations. “Non-domiciled individuals taxed on the remittance basis are now handled by one tax district, again enabling easier cross-referencing and sharing of information.”

Tax inspectors may also be making use of new media, such as the internet, to identify individuals with valuable assets (such as holiday properties that are being let out for income) or undeclared profits (for example, from trading through internet auction sites).

New information sharing agreements between national tax authorities are also having an impact. Following the Tax Information Exchange Agreement between Liechtenstein and HMRC, the details of UK-resident taxpayers who hold accounts or assets in Liechtenstein will be passed to HMRC. “This goes hand-in-hand with the Liechtenstein Disclosure Facility”, says Valerie, “which provides an opportunity for UK taxpayers to declare any unpaid tax voluntarily in exchange for reduced penalties and immunity from prosecution.”

Another notable example that reflects the changing times is the agreement reached between the UK and Switzerland whereby the Swiss banks will levy withholding tax on UK taxpayers’ bank accounts held in Switzerland and pass the sums concerned to HMRC via the Swiss tax authorities. They will do so without identifying any taxpayers, but this nevertheless represents a marked change in attitude by the Swiss Finance Department.

Specific events can also trigger tax investigations, as Valerie explains: “HMRC is currently investigating approximately 500 UK-resident holders of HSBC accounts in Switzerland, using data passed on by an ex-employee. HMRC has been using this data to open Code of Practice 9 investigations – which relate to cases of suspected serious fraud – without apparently screening to check whether taxpayers have already made appropriate disclosures. HMRC’s new Offshore Coordination Unit has started contacting the remaining account holders to offer them the opportunity to make a disclosure.”

This highlights the fact that individuals and businesses can find themselves subject to a tax investigation without there necessarily being any actual wrongdoing. However, given the complexity of the current tax system and the scope for differences of interpretation, any detailed HMRC investigation stands a reasonable chance of finding some element of under-declared tax somewhere in the affairs of an individual or a business.

References

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Forensic Accounting