Navigating HMRC’s Investigatory Focus
Governments worldwide must ensure the integrity of their revenue system. While there are many strategies governments can use to do this, many are choosing to focus on investigations. More specifically, high-net-worth individuals (HNWIs) are under the microscope, not least because these investigations make the biggest headlines. In the UK, data shows increases in income from tax investigations. For HMRC, technology plays a vital role in examining the tax affairs of the wealthy.
Let’s look at what is happening and how to prepare for a tax enquiry. In this post, we’ll cover:
HMRC & The Current Tax Gap
Like all governments, the UK Government wants to ensure the right amount of tax is collected and paid. Governments regularly monitor and investigate tax gaps to ensure they don’t grow too big.
In the UK, the Government publishes the annual Measuring Tax Gaps figures. In recent years, the gap has remained at an all-time low. The latest available figure is for the tax year 2021/22, showing the gap stood at 4.8%.(₁) Compare it to the tax year 2005/06, when the gap was at 7.5%, and you could argue that the UK government’s efforts have borne fruit.
However, the picture tells a different story when you consider the gap in monetary terms. Estimated tax liabilities have increased in recent years, leading to increases in the difference. In 2020/21, the difference stood at £31 billion, which rose to £36 billion for tax year 2021/22.
Measuring the tax gap is complex, and many have differing views on the current estimates. Arguments against the Government’s figure highlight a lack of focus on the shadow economy or tax avoidance schemes. Indeed, HMRC is notorious for its complex tax laws, so the methodology of considering what is owed is often challenged. It’s worth noting that even HMRC revises its figures after initial estimates.
But who’s to blame for the tax gap?
HMRC’s latest findings suggest the following:
- Small businesses represent the largest proportion of the tax gap at £20.2 billion (56%).
- They are followed by criminals, large businesses, and mid-sized businesses. They each account for 11% (£4.1 billion, £3.9 billion, and £3.8 billion, respectively).
- Wealthy individuals account for 5% (£1.7 billion).
With that in mind, what are the authorities doing to close the gap, and why is the focus increasingly on the wealthy?
HMRC & Closing the Tax Gap
HMRC uses different strategies and tactics to close the tax gap and recover more of what it owns. These efforts include:
- Improving tax compliance
- Investigations into businesses and individuals
- Educational measures to improve
- Enhancing tax regulations and tax filing efficiency
But in recent years, much focus has been on the investigatory route. HMRC is investigating wealthy individuals and small businesses to fill in the gaps. Research also shows they have gotten better at it over the years.
Tom Wallace, Director at WTT Consulting and a Tax dispute resolution & HMRC litigation specialist, shared intriguing data on HMRC’s investigatory money.(₂) Research shows the following:
- For every £1 spent to investigate small businesses, HMRC recovered £12.
- For every £1 spent on investigations on HNWIs, HMRC recovered £30.
- For every £1 spent on large companies, the team recovered £58.
HMRC has recovered more from wealthy individuals despite not being the most significant contributor to the tax gap. The focus on the wealthy isn’t a coincidence.
HMRC’s website states that wealthy individuals may present a higher risk because their tax affairs are often global and more complex. Hence, they are at the forefront of the effort to close the tax gap.
HNWIs at the Centre of the Investigatory Focus
Let’s dig deeper to see what the investigatory focus on HMWIs looks like in action.
Initially, you may question whether the wealthy are the focus of HMRC’s efforts. Research by the Bureau of Investigative Journalism and TaxWatch recently reported a drop in cases to investigate specific instances related to offshore and wealthy cases.(₃) While the cases did fall from 1,417 in 18/19 to 627 in 22/23, fluctuations in case numbers have always happened.
There are many reasons why case figures alone don’t tell a complete story. You need to remember that:
- Cases can take years to conclude; therefore, new cases opened in a particular year don’t always show the whole truth.
- The COVID-19 pandemic paused or delayed many ongoing and future investigations. Many operations are only now returning to normal.
When asked about the recent drop in cases, HMRC’s spokesperson told The Guardian that “we still have more than 300 people under criminal investigation as part of our work to tackle the wealthiest and most sophisticated offenders”.(⁴)
However, from a broader perspective, you can see that HMRC’s efforts towards wealthy individuals have increased over the years. The special unit is a prime example.
HMRC’s Wealthy Team works as part of the wider Customer Compliance Group. The team deals with cases involving wealthy individuals, which HMRC defines as people who:
- Have an income of £200,000 or more, or
- Assets equal to or above £2 million in the last three years.
The team’s staffing budget increased from £13.6 million in 2016/17 to £27.1 million in 2022/23. The significant increase shows HMRC believes investigations into the wealthy can be beneficial.
The investigations have the opportunity to yield a lot of money. The recent Bernie Ecclestone investigation brought in £652.6 million in tax and penalties.(⁵) The investigations can create big headlines, which can help HMRC’s overall image with the general public.
How do HMRC’s Investigations of the Wealthy Work?
HMRC currently employs strategies to ensure that wealthy individuals pay the correct tax. Their toolkit includes:
- A cooperative approach through educating and supporting clients.
- Compliance checks to ensure taxes are paid correctly.
- A risk-based model that uses high-quality intelligence data and checks carried out by HMRC caseworkers.
- Customer Compliance Managers are assigned to special customers based on the case’s complexity or the HMRC’s deemed opportunity for non-compliance.
- High-Risk Wealth Programme that accelerates the resolutions for the most complex cases.
- Fraud Investigation Service and Counter-Avoidance to handle tax avoidance schemes and offshore disclosures.
- Alternative Dispute Resolution deals with the most complex disputes.
HMRC’s High-Risk Wealthy Programme (HRWP) is a significant tool for these units. It investigates wealthy individuals and accelerates tax disputes in the most complex cases.
The cases under HRWP typically have a significant amount of tax at risk. Clients can request their cases to fall under HRWP, but the decision is up to HMRC.
The HRWP team seeks to resolve disputes collaboratively. Cases typically end with a settlement. If HMRC suspects tax evasion, the Fraud Investigation Service examines cases.
The special unit uses various techniques to investigate. In recent years, all eyes have been on HMRC’s Artificial Intelligence program, Connect. Launched in 2010, the system recovered over £3 billion of additional tax revenue.
As we mentioned in our LinkedIn post, Connect uses over 30 databases in its investigations.(⁶) The databases include tax returns, credit and debit card accounts, and flight sales. HMRC uses Connect to connect the different pieces of data, creating a trail of evidence they can use to check against your tax record.
For example, if you claim in your return that you have spent less than 80 days in the UK, Connect could look at data from social media or credit card reports. If these place you in the UK for more days, they might launch an investigation.
Strategies to Prepare for a Tax Investigation
HMRC’s attention has turned towards the wealthy. With the increasing use of technology as a tool to launch investigations, the time is now to focus on preparing your tax affairs. The question for many shouldn’t be about if they’ll face an enquiry but when.
An excellent way to start is by understanding the reasons for tax gaps. HMRC’s investigations show the main behavioural reasons for the tax gap are:
- Failure to take reasonable care 30%
- Error 15%
- Evasion 13%
- Legal interpretation 12%
- Criminal attacks 11%
- Non-payment 9%
You could minimise the likelihood of an enquiry by taking due care and limiting errors. A better understanding of your tax compliance issues is an advantage.
There are three key stages to focus on: before the investigation, during it and after. Let’s look at the core mitigation aspect for each step.
Before an Investigation
Preparation is the best way to deal with an enquiry. You need to understand that an investigation is likely. In 2016, HMRC’s report stated that it is running a formal enquiry on around a third of HNWIs.(⁷)
You should talk to your tax advisor and get a clear understanding of your current situation. Focus on strengthening your record-keeping. Technology can help make it easier to stay on top of complex issues such as day counting.
Understand the information HMRC can ask for. They can seek information and documents, including bank statements, invoices, and receipts.
Remember that HMRC uses technology like Connect to examine your affairs. The tax authority has the means to investigate your social media and even flight details. Therefore, you must ensure you can back any claim you make in your tax return—such as how many days you spent in the UK.
During an Investigation
If HMRC opens up an enquiry, you should take a deep breath. These enquiries can happen to anyone and aren’t a sign that you’ve done something malicious.
You don’t want to ignore the issue. Inform your tax advisory team and lawyers and start building your case together. Understand what HMRC is asking for and clear any confusion you have at this enquiry stage.
While you want to ensure you respond to HMRC’s enquiries as quickly as possible, remember your rights. You don’t need to agree with everything they say, and you have the right to challenge their requests. Always talk to a professional team before making decisions or passing any information.
After the Enquiry
Once the enquiry is over, take a moment to review the whole ordeal. While it can be tempting to move on and put it to rest, enquiries can help you better prepare for the future.
Whatever the outcome of the enquiry, it’s crucial to consider what might have prompted it. The knowledge can help you be better prepared for the next time. Remember that getting past one enquiry doesn’t mean the authorities couldn’t look into your affairs again.
Navigating HMRC’s Investigatory Landscape
We at Daysium believe technology is vital at each stage. You can use tax technology to:
- Strengthen your record-keeping to prepare for enquiries.
- Enhance communication with your tax team and the authorities during an investigation.
- Reduce complexity and uncertainty around your tax compliance for the future.
The regulatory landscape is changing. Adopting the right tools allows you to be at the forefront of the change. The goal is to ensure you take care of your tax liabilities and create a strong trail of evidence to support your case. Ultimately, this will benefit all stakeholders.
If you want to transform your tax compliance journey with Daysium, the fastest way to get started is via a Partner. You can check if your tax advisor is already part of our growing Founding Partner Network – if not, ask them to take our Scorecard Assessment and become part of our ever-growing group of experts.
Sources:
https://www.gov.uk/government/news/tax-gap-holds-steady-at-48
