Targeted approach reaping more rewards for the taxman

A shift in HMRC’s strategy has seen taxpayers make 82% more claims to cover the cost of focused probes into their financial affairs, according to insurance providers.

Experts believe that the increase in “aspect inquiries” in July 2010, compared to
July 2009, is clear evidence of HM Revenue & Customs investigating wealthy individuals using a more targeted approach.

But as the aspect inquiries increase, it also put accountants in a stronger position to discourage clients from taking the risk of understating tax liabilities.

These inquiries mainly focus on entrepreneurs’ relief, capital gains tax, investment income and general tax planning, compared to full inquiries that cover an individual’s entire return.

Aspect inquiries are less costly for the taxman to undertake, which means more can be carried out. By definition an aspect inquiry creates a focus on a particular area of a tax return. This yields similar returns to HMRC undertaking fewer, wider investigations after costs are factored in.

“If a client has been a bit ‘slapdash’ in estimating figures, then obviously the figures being put in are much more open to scrutiny in these targeted investigations,” said Paul Mason, senior manager at Abbey Tax Protection, which deals with thousands of claims a year.

“It will give accountants a bit more strength to their argument for making sure clients keep more accurate records.”

The onus is already on the accountants to make sure clients adhere to the rules, as they are the ones who have to arrange and purchase the cover on behalf of clients.

Abbey Tax Protection grants policies on the basis of how many clients the firm retains, the firm’s investigation history and its charge-out rates.

Full inquiries can drag on for 18 months in some cases and are expensive for the client and the taxman, which is currently facing spending cuts and reductions in staff numbers.

July 2010 also saw a 22% increase in the total number of claims notified to Abbey
Tax compared to July 2009, which confirms that HMRC is increasing its overall inquiry activity.

Almost a third of more than 500 claims received by Abbey Tax in July 2010 were related to aspect inquiries.

The swing towards aspect inquiries is important because it is also a key sign of HMRC trying to lower costs while maintaining the tax take.

“It’s much better than going in with a blunderbuss,” Mason said. There is unlikely to be an increase in the cost of policies, because the balance is only shifting from the full-blown probes of an individuals' tax return to the aspect inquiries, Mason added.

Accountants are also helped by the fact they are not officially liable for the professional fees incurred but, by having the insurance in place, the accountant does not have to discount or waive fees.

However, the insurance does not cover any additional duty, interest or penalties charged by HMRC.

Dave Hartnett, HMRC’s permanent secretary, has confirmed that policy has shifted in order to take a more “strategic” approach.

“We’ve begun to think much more carefully about whether we need to hold full-blown tax inquiries as much as we have in the past.

“We’ve decided what are called aspect inquiries are probably more appropriate in more situations than we'd thought before. So yes, it’s a strategic choice for us.”