‘Doctor sentenced for tax fraud’, ‘Tax fraud GP is struck off for persistent dishonesty’, and ‘Belfast doctor Francis Gerard D’Arcy fined £230,000 for tax fraud’. These are all headlines that illustrate that some in the medical profession have been a little less than honest. Granted none relate to optometry, but maybe that means His Majesty’s Revenue and Customs (HMRC) can still find the odd rotten apple.
Hiding income from HMRC is illegal and can lead to serious penalties and possibly prison. Indeed, this is where former Conservative Party chairman Nadhim Zahawi came a cropper, as did Lester Piggott in 1987 after a conviction for failing to declare income of around £3m.
Hidden tax
Each year, HMRC estimates the difference between what it thinks it should collect in tax and what it actually manages to collect. Called the ‘tax gap’, latest estimates for 2020-21 put this figure at £32bn.
According to Helen Thornley, a technical officer at the Association of Taxation Technicians, the gap comprises different factors, from fraud to differences between HMRC and taxpayers on how each thinks the law operates. The gap includes those entirely outside the tax system and ‘moonlighters’ who do not fully declare their income.
Compliance
To ensure taxpayer observance, HMRC carries out a wide range of compliance activities. In figures that Thornley cites, during 2021-22, HMRC launched 265,000 investigations which yielded an extra £30.8bn in tax. ‘These figures,’ says Thornley, ‘were lower than usual due to Covid, which restricted HMRC’s abilities to carry out as much compliance work as it would like to as staff were redirected to other roles.’
She explains that, in general, HMRC has 12 months from the date that a tax return is submitted to open an enquiry – a compliance check – into a return.
HMRC’s understanding
Although most are aware that HMRC can carry out enquiries into their tax affairs, the risk of a random enquiry is perceived as low. However, HMRC has access to an enormous amount of information that allows it to make many more targeted enquiries where what a taxpayer has declared does not fit with the information it has.
In short, Thornley outlines how HMRC either automatically receives, or has the ability to request, information from third parties, including banks and building societies and financial institutions, as well as other government bodies, such as HM Land Registry, Companies House and the Department for Work and Pensions. It can also request data about sales or income from popular online marketplaces.
And as she comments, ‘because of information exchange agreements with other countries, HMRC also automatically receives information from banks and building societies held by UK residents in overseas accounts.’ From her standpoint, this can help HMRC spot undeclared wealth held overseas.
But apart from raw data, HMRC also gets information directly from whistle-blowers, including unhappy business partners, spurned ex-spouses/partners, disgruntled employees, and jealous neighbours.
However, Thornley cautions that data is only part of HMRC’s compliance approach. In fact, without proper analysis it is meaningless and HMRC cannot identify areas of risk. ‘Since 2010, HMRC has had access to powerful data analysis software called Connect, which helps match information from multiple sources to taxpayers and identify patterns or anomalies that need to be investigated,’ she says.
One-to-Many ‘nudge’ letters
So, using information obtained from automatic data exchanges and with the help of Connect, instead of a specific, tailored enquiry into an individual, HMRC often now starts by issuing a standard letter to a number of individuals or businesses that have been identified as potentially under-declaring tax. In Thornley’s view, ‘these “one-to-many” letters act as a cue for taxpayers to review their tax affairs and take appropriate action.’
Recent examples of HMRC’s targeted activity have included identifying changes in the ‘person of significant control’ (PSC) for companies and asking about share disposals; using data from crypto asset exchanges and checking for transactions not on a tax return; and comparing deposits from residential letting to tax return data.
Thornley makes the point that individuals should not ignore these letters: ‘It is important to read the letter carefully to see what action is needed and take appropriate professional advice on how to respond as HMRC will normally want taxpayers to confirm that they consider their tax position is correct. If no action is taken, or HMRC does not accept the response given, then HMRC may move on to open a formal enquiry.’
Coming clean
If a taxpayer knows they have undeclared income, the advice is to seek professional advice and get in touch with HMRC to declare and pay the tax as soon as possible.
Thornley details that penalties are calculated as a percentage of the underpaid tax, potential lost revenue (PLR), and can be anything from zero to 100%, or over 100% for offshore income or gains.
‘Penalties,’ she says, ‘will be lower where the taxpayer voluntarily comes forward to HMRC, and if the taxpayer is cooperative. Taxpayers are scored on how much they “tell, help and give” to HMRC during the enquiry. Therefore, the highest penalties are reserved for uncooperative taxpayers who sought to conceal their income.’
Another consideration is the need to look back. Thornley states, where income has been under-declared as a result of an innocent error then, broadly, any returns ending no more than four years ago will need to be corrected. This can be extended to six years if the understatement was careless, and up to 20 years if the understatement was deliberate.
She warns: ‘It is important to check that undisclosed income doesn’t have a wider impact; there may also be tax consequences over more than one tax. For example, a business that has not declared all of its sales will not only have paid insufficient income tax or corporation tax, but could also have under-declared VAT, or missed that it should have registered for VAT.’
In summary
Once there is a suspicion of under-declared tax, taxpayers should act quickly to correct their position with HMRC. In the long run, this will be the most cost-effective and least stressful approach. With so much data on individuals and businesses, it is only a matter of time before it finds missing tax.