By Phil Mitchell, Director, Harbour Key
Tax is almost constantly in the news as media and politicians discuss issues of avoidance and evasion by major corporates and celebrities. However, behind the headlines the Government is quietly increasing pressure on HM Revenue and Customs (HMRC) to reduce the difference between the amount of tax it actually collects and the amount it estimates is due – the so-called ‘tax gap’ – which is leading to increased pressure on SMEs.
In October 2014 HMRC announced that the tax gap had risen to £34 million, which it blamed on a combination of criminal fraud and mistakes on tax returns. It believes that 50% of this is attributable to SMEs. Before looking at what your organisation can do to ensure its tax affairs are in order, it is helpful to understand what HMRC is doing to collect this ‘missing’ tax.
HMRC has been given extra resources, which it is using in several ways. It has increased staff numbers by recruiting 2,500 new compliance officers. It has introduced tax amnesties for specific sectors, setting up 40 specialist taskforces since the 2010 spending review which have raised over £60 million. And, crucially, it is increasing the number of inspections of business records, which have seen a 60% increase over the last 12 months.
Although HMRC recently admitted that two-thirds of the 800 biggest businesses operating in the UK are under enquiry, it believes that the majority of the additional tax it will collect will be from SMEs. This will be obtained through increased risk assessment of potential tax evasion and avoidance, compliance checks and enquiries.
There is a growing concern that people who make innocent mistakes are being targeted. According to the Daily Telegraph, HMRC made inquiries about the tax affairs of 237,215 people last year, compared with about 119,000 in 2011-12. The number of self-employed people investigated has quadrupled in that time while annual prosecutions have risen sevenfold in three years.
Our experience at Harbour Key shows that HMRC is being smarter in its use of IT systems, which cross check information it holds against other Government agencies and third party sourced information. For example, HMRC receives details of all interest paid on UK bank and building society accounts in the UK, which it is now able to check automatically against interest figures declared on tax returns. In a case we came across, a client had forgotten about one particular account and had therefore not declared a small amount of interest; HMRC picked up this omission from third party records and a general enquiry into the organisation’s affairs ensued.
Rather than opening a general enquiry, HMRC’s new approach is to first undertake a review of the business records. If the review indicates poor record keeping or other sign of accounting weakness, it will open an enquiry. Common areas for challenge are:
– Dual business/private expenditure e.g. car use or telephone landline use, where the Inspector challenges the basis on which the business and personal use split has been calculated
– Poor expense claim details and review processes
– Valuation of goodwill if a business has been incorporated into a limited company
– Valuation of property on transfer to shareholders/pension funds or dividends in specie.
Any successful challenge to reduce the business element or increase a valuation means extra revenue for the Treasury. The additional tax to pay may or may not be a large sum, but the main issue is the time it takes and the cost in dealing with the enquiry. The cost of professional fees for handling an enquiry can be significant, as the enquiry can go back a number of years and some will take a significant amount of time and effort to settle.
With this increased activity from HMRC, businesses should:
1. Check that record keeping is thorough and fully up to date
2. Have robust employee expense policy and procedures
3. If you discover a mistake or error which impacts earlier filed returns, raise any concerns or areas of uncertainty with your business accountants so that they can be addressed promptly. Penalties are lower (and could be avoided) if a voluntary disclosure is made, as opposed to HMRC raising the issue.
4. Consider tax investigation fee insurance, which will cover the cost of an advisor to deal with an enquiry into your business’s tax return.
Before buying new insurance, check whether tax investigations are already covered by your existing legal expenses/business insurance package. Your business may also be covered through membership of a professional organisation; for example, the Federation of Small Businesses currently offers tax investigation fee insurance as part of its annual membership fee.
In HMRC’s dash for cash, it is prudent to consider whether you and your business need cover. If you are not covered by an existing policy, we recommend that you speak to your advisor, who should be able to introduce you to an insurance provider.