Tax Investigations – What Happens If You Are Chosen?

Figures disclosed under the Freedom of Information Act 2000 show that the number of people being investigated by HM Revenue and Customs (HMRC) has doubled over the past year. This article considers the reasons why this has happened, and details the procedure where a taxpayer has been ‘chosen’ for investigation.

 

Last year HMRC made enquiries into the tax affairs of 237,215 people, a 50% increase compared with 2011/12. The number of self-employed people investigated has quadrupled in that time, while annual prosecutions have risen sevenfold in three years. Interestingly, the number of tax investigations that have resulted in prosecutions has arisen from 165 in 2010/11 to 1,165 in 2014/15 – again a sevenfold increase, but the numbers are relatively few. Despite relatively low numbers, roughly for every pound that a tax investigation– costs, £10 is collected.

 

HMRC has the power to enquire into any return and request information to establish whether that return is correct. No reasons need be given for the enquiry and invariably it will not be disclosed. 

 

However, it costs money to investigate, so HMRC have been concentrating their investigation efforts on ‘targeted campaigns’ run by ‘taskforces’ of which there are currently 56 taskforces in operation, ranging from the scrap metal trade to restaurants. Teams have been formed from across HMRC, including criminal investigations, specialist investigations and local compliance departments who each use HMRC’s advanced computer system (named ‘Connect’) in the tracing of likely tax evaders. To do this, they collate as much information as possible from third parties, such as banks and local councils. 

 

For example, as HMRC has access to Land Registry records, details of every property bought in the UK is known so that when a property is sold the seller’s name is checked and compared with the Council Tax records. If the names are not the same and the owner has not declared any rental income, there is the potential for an investigation.

 

The computer also stores records from the Driver & Vehicle Licensing Agency, hospitals, insurers, etc. – and even the official list of gas engineers! With this data it is possible to check entries on an individual’s tax returns. The computer also has the facility to collate and compare details of taxpayers’ situations to give an indication of particular industries where there might be potential for tax shortfalls. 

 

Each ‘campaign’ runs for a set period. Those taxpayers who come forward voluntarily typically receive more lenient treatment. After the campaign has closed, HMRC use the information gathered to conduct more detailed investigations, and possibly to prosecute those who have not come forward voluntarily. 

 

The first indication that an investigation has started will be the receipt of a letter accompanied by a Code of Practice leaflet, which gives detailed guidance on the taxpayer’s legal rights and obligations. HMRC’s letter will not specifically say what has triggered the investigation. However, sometimes it will be obvious, such as an omission on the tax return. Sometimes it can be a result of the taxpayer not coming forward during one of the ‘campaigns’ when HMRC have information on the taxpayer’s non-declared income.

 

Which of the Codes of Practice (CoP) issued will depend on the type of enquiry being undertaken as follows:

 

Code of Practice 8 – Used in cases of suspected tax avoidance. This Code is operated only by the elite Specialist Investigations branch of HMRC with a remit to deal with novel, unusual, and complex situations.

 

Code of Practice 9 – Used in cases of suspected serious tax fraud where HMRC has strong evidence of tax being under-declared due to tax evasion and the total yield of tax, interest and penalties is above a certain threshold (see below).

 

Factsheet CC/FS1a – General Information about compliance checks’ (this factsheet replaced ‘Code of Practice 11’) - Used during local compliance checks of self-assessment tax returns. Should the officer request a meeting to view documents at the taxpayers premises Factsheet CC/FS3 – Visits – by agreement or with advance notice’ will also be issued.

 

Code of Practice 26 – Used to investigate cases of overpaid tax credits.

 

An enquiry may be:

 

• a ‘full’ enquiry - checking a return as a whole including the accounts; or
• an ‘aspect’ enquiry – looking at specific areas or claims relative to a return (e.g. HMRC may have received confirmation that a property is being let but the owner has not completed the letting pages of the return).

 

Full enquiries tend to concentrate on areas where there is invariably a high risk of error or evasion. HMRC’s computer programmes will determine the level of risk. HMRC can go back and enquire into the previous six years’ returns for ‘careless’ behaviour, but if serious fraud is suspected they can go back 20 years (under TMA 1970, s 36). The amount of penalty charged will depend on the co-operation of the taxpayer, the disclosure and seriousness of the fraud.

 

 

Under Code of Practice 9 investigations, individuals are offered a chance to participate in the Contractual Disclosure Facility (CDF), whereby an invitation is made by letter for the taxpayer to take part in the CDF. The taxpayer then has 60 days to respond. If the taxpayer agrees to undergo the CDF they will be asked to sign a contract to confirm or deny that tax fraud has been committed. In return for full disclosure and cooperation from the taxpayer, HMRC agrees not to prosecute. The decision to offer the CDF is entirely at HMRC’s discretion.

 

If admitted, an outline disclosure form is submitted by the taxpayer admitting to loss of tax through deliberate conduct. The form requires a description of the fraud, how it was carried out, when it happened, details of the records that are held and an estimate of the amounts involved must be submitted online within the same 60 day period. If it is later discovered that there has been any deliberate conduct not set out in the outline disclosure, HMRC reserve the right to undertake a criminal investigation and possible prosecution for that deliberate conduct. 

 

If fraud is denied, or the letter is not replied to, HMRC will commence a formal investigation, which will include issuing demands for information; they may also make contact with the taxpayer’s bank, and also customers and suppliers if the investigation relates to a business.

 

HMRC may invite the taxpayer to a face-to-face meeting to confirm the amount and type of fraud so that at the conclusion of the investigation the taxpayer can certify that a full and complete disclosure has been made. The taxpayer also provides:

 

• a certified statement of worldwide personal assets and liabilities 
• certificates of bank accounts and credit cards operated 
• a certificate of full disclosure. 

 

The conclusion of the investigation will produce an agreed civil settlement for tax arrears (for up to 20 years), late payment interest and a tax geared penalty (up to 100% of the tax due for UK income and gains, but higher for offshore income and gains).

 

Further information can be found here: Admitting tax fraud: the Contractual Disclosure Facility (CDF).

 

Only a very small percentage of investigations are random, therefore if a taxpayer receives an enquiry letter from HMRC it means that the taxpayer must have done something to merit their attention. Taxpayers who are subject to HMRC investigations under COP8 or COP9 are strongly advised to seek expert professional help.