THE TAXMAN IS upping the ante on tax collections, and is planning a fivefold increase in the number of prosecutions for tax avoidance. So what does this mean for you and your clients?
HMRC is clearly keen to show it is sharpening up its act on collecting tax – but it may have some way to go if it is to meet its target of collecting additional tax of £7bn each year by 2014/15.
The volume of projects now underway – too many to cover in one article – may make it feel like HMRC is attacking the tax gap on all fronts but, in reality, it is sticking to its tried and tested risk based approach and offering a few carrots.
It recently announced, for example, it is spending some of the £917m that the Treasury is allowing it to invest in enforcement activities on setting up ten new ‘task forces’ to tackle tax evasion. The first is targeting restaurants in London and then in other areas – a sector targeted for a number of projects in the past. The other task forces (cross-disciplinary teams) will target specific ‘high risk trade sectors and locations across the UK’.
Poor record keeping
HMRC claims its analysis shows that businesses with poor records usually underpay tax. Therefore, it is piloting business records checks for businesses across the country. Up to 1,200 SMEs will be approached about a meeting at their premises to check their records for the current tax year. The exercise will be rolled out fully in autumn 2011 with up to 50,000 SMEs checked annually and HMRC expects to collect an additional £600m over four years.
The main risk from a business records check is that HMRC identifies mistakes, or worse, in the paperwork and this leads to a subsequent tax investigation. However, refusing a visit should only be considered in dire cases as it is likely to put your client even higher up HMRC’s risk list for the future.
When HMRC carries out a compliance visit, its officers now follow a single compliance process and focus “solely on the risks and behaviours identified in cases and throughout the life of the compliance check, irrespective of the head of duty”. So, for example, if errors occur on a VAT return, officers will work on the assumption that errors have been made for other taxes.
Increase criminal prosecutions
Earlier this year, it emerged that HMRC plans to increase criminal prosecutions from the present 200 a year to 1,000 a year in future. However, at the time of writing it has yet to publish its new prosecution policy that had been scheduled for release in April 2011.
Taxpayers who are behind with payments and have not applied for a ‘time to pay’ agreement (now rather harder to obtain than previously) can now expect to receive a cajoling and threatening letter from HMRC chasing up the debt. One such letter not only mentioned that HMRC needs the money ‘to pay for the hospitals and schools we all rely on’ but threatened that HMRC could collect by ‘taking your possessions and auctioning them publicly’ – usually at a knock down price.
Of course, it is illegal for any debt collectors to barge into a person’s home and seize goods without a court order. However, HMRC has apparently claimed that such letters have helped it reduce unpaid taxes by £6bn in 18 months so it looks like they are here to stay.
Tax amnesties have proved remunerative for HMRC in recent years. Although some have predicted that the law of diminishing returns would soon kick in, HMRC continues to offer amnesties on a sector-by-sector basis- most recently the Plumbers Tax Safe Plan (PTSP). We can expect further sector based schemes in the future and, like the PTSP, they are likely to offer broadly similar terms for voluntary disclosures from any UK resident to avoid arguments on fairness.
Fine line for VAT registrations
Most recently, HMRC announced a summer campaign on VAT registration. We understand that it will now identify individuals and businesses that have returned annual turnovers above, or very close to, the annual VAT registration threshold and check that they are VAT registered. Why it did not do this before remains unclear, however, it seems likely that another tax disclosure facility (amnesty) will be run alongside this project.
HMRC is very happy with its amnesties for overseas assets: it has recently trebled its estimate of the additional tax it will collect through the Lichtenstein disclosure facility (LDF) to £3bn – no real surprise as, in my experience, it is usually a very good deal for clients.
The expected “tax accord” between the UK and Switzerland will be the next frontier and HMRC has stated that the arrangement will include some “novel features”. Details are still vague, but some sort of withholding tax mechanism applied purely to Swiss accounts (rather than for all overseas assets) is rumoured. The withholding tax might apply to interest earned, together with a percentage of the assets in the accounts being taken to cover prior years. It is difficult to see how this will work in practice but it may cause a hiatus in LDF registrations as individuals with Swiss assets hope for a better deal.
HMRC is rightly going for the low-hanging fruit – the most cost effective option in the short term. However, I do wonder how long it will be possible to increase collection rates through sound-bite friendly projects alone: improving its day-to-day operating standards would surely increase the tax take as well as making all our lives easier.
John Cassidy is tax investigations and dispute resolution partner at PKF (UK) LLP
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