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Why you’re now more at risk of a tax investigation and what to do

James Cordiner, Tax Investigations Manager at Markel Tax discusses the current climate

With new powers introduced last year for HMRC to target ‘till fraud’, it’s a stark reminder that tax investigations are on the rise. In the first quarter of 2021 HMRC increased compliance investigations by 36% to 102,000; almost quadruple the low of 27,000 in the second quarter of 2020. 

As businesses continue to navigate the current climate of high inflation costs, the on-going challenge of supply issues, rising energy prices and the cost-of-living crisis, even those organisations with an impeccable tax compliance history are at risk of an investigation.

A new HMRC taskforce launched in April 2021 expanded its compliance work and committed 1,265 people to recovering money from incorrect and fraudulent claims. Up to that point HMRC had opened 10,000 enquiries into potential Covid support scheme claim fraud. The new investment looked to more than double that to at least 30,000 enquiries into both fraud cases and also general company compliance enquiries. 

When combined with the new powers announced this month allowing HMRC to clamp down on electronic sales suppression (ESS) to recover tax revenues, this clearly demonstrates the lengths the government is prepared to take to claw back vital public funds.  This continues its longer-term goal of raising more money from tackling aggressive tax planning, avoidance, and evasion. Statistics published last week by HMRC reveal the estimated tax gap for the 2020/21 tax year is 5.1% – the second lowest recorded percentage. 

Businesses need to get on the front foot to help minimise disruption and costs bought about by a tax investigation, and it is vital organisations can fund the cost of answering HMRC’s detailed questions to satisfy concerns as far as possible. 

The upsurge in HMRC activity will not just hit those suspected of fraud but will also include more routine checks and enquiries. All businesses should therefore be on high alert as huge numbers of HMRC compliance officers were redeployed away from their normal jobs, towards Covid support schemes. Now that these support schemes have ended, they have moved back to normal compliance work, leading to a resurgence in compliance activity alongside investigations into Covid support schemes.

Lengthy Tax Investigations 

HMRC enquiries have become much more time consuming and costly to deal with over the last five to 10 years mainly due to HMRC’s policy and general approach to compliance activity. Alongside fee protection insurance cover (which provides expert support and guards against an accountant’s additional client fees in the event of an HMRC investigation), businesses and accountants should consider specialist support with handling enquiries. 

Challenging HMRC penalties

One reason for the mounting costs associated with HMRC enquiries is the tougher stance on penalties. Compliance officers increasingly take a default position that non-compliant activity is ‘deliberate’, which carries higher penalties than if it was treated as ‘careless’, together with the risk of being named and shamed.

A regular question received by the Markel Tax investigations team relates to the category of behaviour and the penalties that should apply. If you can reduce the category from ‘deliberate’ to ‘careless’, you won’t be named and shamed, and it also brings in the consideration of suspending the penalty. We often find that officers have not read their own guidance about what constitutes deliberate versus careless behaviour. Therefore, when HMRC put forward their view on this, it is imperative that this is reviewed carefully to ensure the facts are fully considered.

Belligerent tax inspectors

Having an expert team at hand to take over the enquiry can be a huge relief for businesses being investigated and their accountants. Our experience is that HMRC have become more belligerent and dogmatic, with officers becoming harder to convince of the right position, even where the facts demonstrate no wrongdoing.

The Markel Tax team has spent a lot of time in the last 11 years assisting clients through the Alternative Dispute Resolution (ADR) process as an alternative to the more formal and much more costly tribunal process. In most cases, we’ve had successful outcomes for clients when utilising this option for resolving sometimes long-drawn-out disputed areas of tax. The fact is that having to use the ADR facility more often shows HMRC have been more reluctant to back down.

When looking at the growing storm that has been brewing within HMRC over the last two years, from Covid support scheme investigations, increased HMRC resources and tougher inspectors, the risks to businesses are set to steepen considerably. Insurance cover and specialist help have therefore become critical ways to help businesses cope with the worry and stress of dealing with a tax investigation allowing them to stay focused on the day-to-day job of running their operations.

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