Q Recent newspapers articles and reports seem to suggest that H M Revenue & Customs (HMRC) have become more aggressive since the last election. Is this true and who or what are HMRC currently targeting?

A. Following on from the election and the subsequent budgets, the initial attention centered on the Governments proposed spending cuts and its implications on our every day lives.  The focus now seems to be just as much on the other side of the coin which is increasing revenue.

HMRC have come under increasing pressure to ensure that tax receipts from all sources are maximized. Whether this be by compliance, tax enquires or targeted initiatives, HMRC will no doubt use all the powers available to them to achieve their aims. An additional sum of £900 million was set aside in George Osborne’s first budget for HMRC to target tax evasion and we are now seeing the effects of HMRC’s drive to achieve the target set by the government of collecting an additional £7 billion from tax evasion in the period up to the next election in 2015.

The Taxwise claims department have seen a 30% increase in claims during the 12 months ended 31 March 2011 over the previous year. The majority of the increase came from PAYE and VAT compliance visits.

Under the new recently introduced powers of enquiry and penalty regime, HMRC’s primary focus is on encouraging people to voluntarily regulate their tax affairs by providing taxpayers with an incentive to do so. However, for those who do not take the opportunities the threat of harsher treatment simply increases. If HMRC later discovers irregularities in their tax affairs, they risk severe penalties. Below are the range of penalties available to HMRC under these new powers. The percentages shown are applied to the understated tax and are in addition to interest for late payment.

Unprompted Disclosure MaximumMinimum 30%0% 70%20% 100%30%
Prompted Disclosure MaximumMinimum 30%15% 70%35% 100%50%

Over the last two years we have seen several initiatives or amnesties, including one which was specifically designed for those with offshore income whilst others have targeted the medical profession and most recently plumbers and heating engineers. It would appear we can expect HMRC to continue rolling out these initiatives.

Amnesties offering lower penalties to those who come forward isn’t the only way HMRC is targeting tax evaders. In August 2009 HMRC obtained leave from the new Tax Tribunal to serve information notices on all banks with a UK presence requiring these banks to provide information in their “power or possession” in relation to UK residents with offshore accounts. This has provided HMRC with sufficient information to enable it to mount an investigation into anybody whose name appeared on the lists provided by the banks in respect of whom they had no knowledge of an offshore account from tax returns, submitted or not.

If an individual or business does have irregularities in their tax affairs, the best way to minimize the chances of prosecution and secure a civil settlement with HMRC is to disclose all errors voluntarily and assist the Revenue in calculating the amount of the tax liability. If voluntary disclosure is not possible because HMRC has already opened an investigation, the key to a successful outcome is cooperation. Under no circumstances should an individual – or their agent – knowingly deceive HMRC. At the least, such behavior would result in a higher settlement being sought whilst at worst it could result in the criminal prosecution of the taxpayer.

Many people who are investigated by HMRC focus on the need to minimize the penalty percentage when arriving at a civil settlement. Whilst this is important taxpayers and their agents should be aware that since the level of penalty is tax geared, it is essential in the first instance to keep focused on minimizing the tax liability.

In most cases this makes far more difference to the final liability than reducing the penalty loading. However, the penalty is an important aspect of any settlement and you should remember that the new penalty regime as shown by the above table is governed by the behaviors of taxpayers.

It is therefore important for the taxpayer to demonstrate that problems with their tax affairs have not arisen as a result of a deliberate attempt to evade tax and that they have taken reasonable care to ensure full tax compliance at all times.

TaxWise is available to help answer any tax queries. Just call the Advice Service on 01455 852555 and one of our specialists will be happy to help.