Q. It seems that H M Revenue & Customs (HMRC) are currently announcing a new initiative to tackle tax evasion every month at the moment. Are these actually effective or are they merely high profile “scare tactics”?
A. Since 2010, HMRC have started to use “taskforces” targeting a broad range of different business sectors from doctors and dentists, plumbers and electricians, restaurant owners through to landlords to name just a few.
The taskforces are part of the £917m funding which was ring fenced in 2010 from the government spending review in order to tackle tax evasion, avoidance and fraud from 2011/12. The target is aimed at raising an additional £7bn each year by 2014/15.
HMRC have stated that they consider this to be a smart use of resources and a wise way to spend the allocated funds. Many accountants and tax advisers broadly agree with HMRC’s statement but there is certain doubt as to whether returns from the campaigns are worth the effort. Some accountants, however, think that a general tax amnesty could potentially recoup more tax.
More than 20 targeted taskforces have been launched since the beginning of 2011 with HMRC planning a further 30 more during 2012-13.
Each specialist team will do intense research and tax investigations to uncover businesses which owe the government tax.
HMRC says that it has raised more than £500m to date from taskforces over the past five years (including “offshore disclosure facilities”) but this figure does not reflect the results of the latest round of taskforces that have been announced in the last 12 months.
Whilst the £500m recouped to date may sound impressive, it only accounts for approximately 2% of the total estimated £35 billion tax gap - the difference between the tax that the HMRC thinks should be collected and the amount which has actually been collected. Some professionals dispute this figure and think that the tax gap could, in actual fact, be much higher than HMRC’s estimate.
The amount of tax each taskforce collects varies but, to date, it has been typically between £2m and £15m.
So far the taskforces, which use software to help inspectors track down tax evaders, are aimed at parts of the economy where HMRC has evidence of tax evasion. People who approach HMRC at the start of each targeted taskforce and make voluntary disclosures about their financial affairs along with any undeclared income typically receive more lenient treatment.
As part of the current initiatives to tackle evasion and avoidance, HMRC have also used tax amnesties and criminal and civil prosecutions. Offshore tax amnesties, such as the Liechtenstein Disclosure Facility, and a deal made with the Swiss government to tax money held by British citizens in “secret” Swiss bank accounts are expected to raise billions and are consider by most professional advisors has having been a great success.
However, measuring the success of the taskforces is difficult because HMRC does not give targets or set certain levels of funding for how much it wants each taskforce to raise. The taskforces have a number of attractions for HMRC. They are cheap to run and easy to manage. In theory, taxpayers are the ones doing the majority of the hard work on behalf of the HMRC by owning up to tax owed and filling in a lot of the documentation. This saves a lot of time and effort for those at HMRC meaning they are able to work on other jobs.
It should also be remembered as HMRC points out that its campaigns and taskforce work are in addition to regular and on-going compliance activity. Which profession will HMRC target next? HMRC declines to comment!
However in order to maximise returns from the campaigns, HMRC needs sufficient trained staff to work with the vast amount of information they hold. Although HMRC made “substantial progress” in increasing tax yield, it is estimated that an additional £1.1bn could have been collected had HMRC not cut more than 3,000 jobs over a five-year period, the Commons Public Accounts Committee announced in a report published in May 2012.
HMRC state the “honest taxpayer” has absolutely nothing to fear from HMRC campaigns. “HMRC have a responsibility to ensure everyone pay's their fair share in tax and that the tax rules are respected across the board."
If you are investigated by a targeted campaign and you have under declared income it is important to make sure you “come clean” about all assets they may owe tax on – not just those targeted by the HMRC taskforce as quickly and accurately as possible. Any tax outstanding should also be paid as quickly as possible to stop further interest charges arising. Remember always seek professional guidance
If you have any questions or need guidance on any of the issues raised above our tax experts are available on 01455 852550.