The UK has no money. Is the HMRC crackdown set to increase?

While the headline might not be quite true, events over the last few years have certainly impacted UK borrowing. The Covid-19 pandemic resulted in public spending of between £310 billion to £410 billion. To put that into context, public sector borrowing for 2022/23 was around £130 billion according to the ONS.

Whilst Covid-19 might be somewhat in the past, public finances are still in a poor state with an economy that is struggling to grow and significant geopolitical pressures, not least the war in Ukraine.

The current UK Government reduced taxes in the Spring Budget, but their ability to go further is hampered by the current climate and fiscal restraints. One way to reduce this pressure, of course, is to bring additional monies into the treasury – either in the form of extra tax receipts through growth or via greater tax compliance by UK businesses.

We know the Absolute Tax Gap figure in 2022 was £35.8bn (up from £30.8bn in 2021), with SMEs making up 56% of that figure. That’s £20bn the Government would certainly welcome back into its coffers at the current time.

From Markel’s perspective, tax investigations have certainly increased since Covid times with HMRC’s compliance activity being wide and varied. HMRC’s dedicated Taxpayer Protection Taskforce was disbanded in September last year and with those c2,500 staff reverting back into day to day compliance work, it is reasonable to expect enquiries to be on the increase. 

Certainly tax investigations can cause significant strain on a business. In recent dealings, the Markel Tax team was asked to support a client that had a significant six figure penalty imposed upon them by HMRC. The Markel consultant reviewed the facts of the case to determine that HMRC’s view was entirely unreasonable. A detailed response and summary of the key factors was presented back to HMRC resulting in the penalty assessment being vacated which was of great relief to the client.  

Given that cases like these are all too common, it is well worth SMEs trying to avoid an investigation in the first place or, should one occur, be set up to ensure the impact on their organisation is minimised. 

Here are four tips on how accountants can help to reduce the risk of an HMRC tax investigation for their clients:

Client records review

Accountants can play a vital role in educating clients on how to keep records of their affairs to ensure compliance with relevant tax laws and regulations. By identifying and rectifying any potential issues or discrepancies, accountants can help ensure their clients’ are less likely to encounter issues with HMRC should an investigation occur.

Fee protection insurance

Fee protection insurance can play an important role for both accountants and their clients. Additional accountancy fees can be covered should one of their clients be investigated, helping to avoid awkward conversations about large bills to deal with all aspects of HMRC’s scrutiny. Clients taking out fee protection insurance for themselves will have the support of a qualified tax investigation professional to support them and their client as they go through a detailed inspection.

Regular communication

By maintaining open and proactive communication with their clients throughout the year, accountants will be better placed to ensure clients are given the right support and advice, helping to minimise the effect of an HMRC tax investigation.

Avoiding HMRC ‘triggers’

Although there are no definitive triggers used by HMRC to identify individuals and businesses to investigate, avoiding certain actions can help to reduce the risk of being targeted. Helping clients not to file late may be one of the more obvious ways accountants can support their clients in this regard. Avoiding reporting numbers in significantly different ways from one year to the next, especially where turnover is similar, may be another.

The UK economy is certainly not one with excess cash at the present time. Given this situation and the need for the Government to help the economy grow, it is safe to assume HMRC is looking at ways to reduce the Absolute Tax Gap. We are certainly seeing this in the R&D space where an additional 250 inspectors have been brought in, and the signs are pointing to greater scrutiny when it comes to more general tax investigations as well.