HMRC investigations 101

HMRC investigations 101

“You better watch out, you better not cry, better not pout, I’m telling you why – the taxman’s going to take you to town”.

Apologies – after years in accountancy, I’ve always wanted to use that line but I never found an appropriate outlet! On a much more serious note, there has been a gathering accumulation of power by HMRC over the last few years.

They have always been a determined bunch of people when collecting taxes but now, in order to plug what they call “the tax gap”, they’re coming after people and companies more than ever before. The tax gap was last estimated at £34bn – it’s the difference between what HMRC expect to collect and what they actually collect.

They’re looking for underreporting in personal income, company income, landfill tax, PAYE, insurance premium tax, and VAT.

So, what do you need to know?


Small and large businesses increasingly under the spotlight

HMRC have upped their spending on investigating larger businesses. That’s because of the increasing rate of returns they’re getting from those investigations on the top 0.5% of companies whose tax contributions equal 40% of the overall take.

For the last tax year where figures are available (2016/2017), the Revenue returned £77 for every £1 they spent on an investigation. The Diverted Profits Tax, brought in during 2015 specifically for companies like Google and Amazon, has also produced impressive returns when investigations into these companies have been carried out so it’s reasonable to assume that this is a well they’ll keep on tapping for the foreseeable future.

Smaller business are also coming under the spotlight. There are 5.7 million of them in the UK. And HMRC employs a very high-tech way of finding sole traders and directors of small businesses to investigate – their supercomputer.


The HMRC supercomputer

Designed to make connections too subtle and nuanced for the normal human brain, HMRC’s latest software program, “Connect”, ploughs through information compiled from various other databases, such as the Land Registry, Companies House and the electoral roll.

Connect can access data from a vast range of apps and platforms, including Apple, Amazon and Airbnb. The HMRC can compare credit card data, property transactions, bank accounts, and your self-assessment forms.

The programme then hunts down anomalies in the data that point to suspected tax-evading.

Even something as simple a photo on Facebook can set the HMRC’s alarm bells ringing.

If someone is paying minimal tax but is constantly posting pictures of flashy cars and expensive holidays, and bragging about how well their business is doing, it strongly suggests they may be under-declaring.

Famously, several individuals seen on Channel 4’s My Big Fat Gypsy Wedding were caught out after spending thousands of pounds of undeclared income on lavish weddings on the show. It’s safe to say, the HMRC has eyes everywhere.

Connect draws data from:

  • Bank accounts and financial institutions (including from 60 other countries and territories)
  • DVLA
  • Land Registry
  • Visa and Mastercard transactions
  • Council tax
  • VAT
  • Previous tax investigations
  • Previous tax returns
  • Earnings (from any employer)
  • Child benefit payments
  • Maintenance payments
  • Ebay, Amazon, Gumtree, Etsy, Airbnb
  • Twitter
  • Facebook
  • Instagram

It uses all that information to look for anomalies. “We all leave a massive electronic footprint of where we are, when we are away, what we do and what we spend,” George Bull, RSM senior tax partner told the Telegraph. Richard Morley, accountant at BDO states that “This is the tipping of the scales…Five years ago those making minor tax errors would feel fairly safe. But HMRC now has more information and more access to information.”


What to avoid on and explain about your tax return

Even with all of this modern tech, the first place the taxman will look for discrepancies is in your yearly tax return.

Even if you have nothing to hide, there are 7 common mistakes or features of your tax returns that will raise red flags for the assessors at HMRC.

  1. Frequent late submissions

Filing your tax returns late is never a good thing. In addition to potential fines, not having an explanation can become a serious cause of concern for Revenue and Customs. Sending returns in by the deadline lets them know you are cooperative and compliant with the HMRC’s rules.

  1. Mistakes

We all make mistakes now and then, but if they keep regularly popping up on your tax returns, it’s likely the HMRC will want to know why. Tax returns can be extremely complicated so it always pays to use qualified accountant like the team here at Smart Team to make sure everything is filled in correctly.

  1. Your financial figures not match industry norms

If you appear to be drastically over- or under-performing for a business of your kind, it may cause HMRC to do a double take at your figures. They’ll be comparing you to their industry averages so be aware that you may be investigated further.

  1. No profit

New businesses can take a while to get off the ground, and even longstanding companies can hit hard times. But when a business has running for years but hasn’t yet turned a profit, the HMRC will begin to question how you have kept it running all that time.

  1. Not declaring all your income

It may sound obvious, but you must disclose every source of income you may have on your tax returns. If you have rental properties, have recently sold any assets, or received returns on an investment, these must be included. This is something that the Connect database is likely to pull up, so it’s important that you leave nothing out.

  1. Fluctuations in your profits

Many business owners have experienced the financial ebbs and flows of running a company, but drastic changes will definitely stand out to the taxman’s assessors. If your income suddenly drops and your expenditure rises, your tax liability will reduce which will look suspicious from HMRC’s perspective. Make sure you include details and explanations of these changes when you file your tax return.

  1. Unjustified expense claims

Legitimate business expenses are easily proven. Make sure you keep accurate records and file your receipts for your tax returns so the HMRC has no reason to doubt your claims.

Any discrepancies in your tax return will almost certainly be picked out and make you a potential target for investigation.

The HMRC is known to look favourably on those who use an accountant as it is a lot less likely that they are hiding something.

An estimated 7% of all HMRC investigations are random, so making sure you have an expert dealing with your accounting and tax responsibilities is the best way you can make sure your tax returns are accurate and to help you prepare if an investigation is triggered.


HMRC penalties

HMRC are less willing to believe taxpayers when they claim an honest mistake on their returns. More and more tax investigations are resulting in an accusation of taxpayers making “deliberate errors” – either intentionally making a mistake or not reporting a mistake that they know of from a previous tax return.

If a taxpayer is found guilty by HMRC of making an error, HMRC will increase the level of fines imposed on them and monitor them “more closely” in the following years in the hope/expectation that they’ll be able to levy further fines later on.

In 2014/2015, just over 20,000 taxpayers were accused of making deliberate errors. In 2016/2017, this had increased to just over 34,000, a 70% increase.


Current HMRC campaigns

HMRC currently have three campaigns running offering taxpayers a form of “amnesty” for self-reporting underpayments and under-declarations of tax:

  • Let Property Campaign – link to the Government website here.
  • Card Transaction Programme – there’s a Smart Team article on this here.
  • Requirement to Correct Campaign – there’s a Smart Team article on this here. Time is running out on this one – the deadline is the 30th of December.


Talk to SMART team today

Call us today on 01202 577 500 or email us at for advice and support tailored to you and your business.

Start typing and press Enter to search