For any individual the idea of a tax investigation can be a real cause for concern but with the government’s increasing focus on tax evasion and their stated intention to recoup several billion pounds over the next few years, the chances of becoming involved in an investigation are increasing for UK citizens and their advisers.
Publicity over the last few months has highlighted that HM Revenue & Customs (HMRC) is in the process off upping its game – leveraging on the requirements for financial institutions and advisors to report on clients’ affairs if they have reasonable suspicion of criminal intent which can include any tax misdemeanours.
The implications of such investigations can be severe, ranging from large bills for unpaid tax, associated interest and penalties to possible criminal prosecution. They are likely to affect a range of people from those who use offshore accounts to individuals undertaking frequent cash transactions.
Even if an individual has behaved impeccably the emotional distress caused by an investigation, combined with the time taken can be extremely damaging, especially to the eight million self-employed individuals who normally feature towards the top of the target list.
Furthermore, for Independent Financial Advisors or smaller firms of accountants, finding HMRC on the doorstep investigating a client unexpectedly, can be extremely damaging to both revenue and reputation. And, should tax evasion be detected, the advisor could face investigation himself. So just how should you respond to an investigation by HMRC?
Targeting Evaders
With the well publicised budgetary shortfall, the government is under growing pressure to boost revenues and, with further tax rises likely to cost the government votes the focus has instead turned towards recouping the estimated millions of pounds of tax that go unpaid each year. Having focused much attention in previous years on closing the loopholes that have enabled tax avoidance, there is now a renewed focus on tracking down tax evaders.
Certainly the commitment to cut down on tax evasion is strong: HMRC is using a special £66m investigation fund, established in Chancellor Gordon Brown's 2003 budget specifically to target tax fraud of all kinds. And the goal is clear: the government intends to recoup several billion pounds by 2007.
The result of this increased focus on tax evasion is a changing tax climate for the individual. HMRC’s targeting is increasingly based on intelligence gained from financial institutions and advisers under the requirements of Proceeds of Crime legislation. They have also added new resources to increase the number of personal tax investigations. But this in turn also affects the climate for financial experts, from IFAs to accountants and banks, who are now tasked with revealing suspicions of tax evasion.
Offshore Danger
One key area of focus is the use of offshore financial institutions, with HMRC estimating that the UK treasury loses hundreds of millions of pounds per year as a result of the illegal use of offshore accounts to hide income. While the focus of the Liverpool based Offshore Projects group is to look mainly at those with large amounts of money offshore, smaller savers are getting caught up in the investigations. This is because banks, financial advisors and accountants are now bound to reveal details of clients’ offshore accounts, if they suspect tax evasion – or face severe penalties.
Indeed, in July HMRC has sent letters to 500 UK residents holding offshore accounts offering ‘a chance to reconsider tax affairs if necessary’. These ‘enabling letters’ note that HMRC holds information that an offshore bank account has been operated and that, while not necessarily being an indication of wrong doing, such accounts are often associated with tax evasion.
Given the onus now placed on financial advisors, from IFAs to banks, to reveal clients’ offshore accounts, it is likely that many more individuals will receive such letters and face the consequences of investigation that may lead to the payment of additional tax, interest and penalties – even criminal prosecution. It is likely that HMRC will rollout this programme further once they have assimilated the initial results.
Added to this is the fact that the EU Savings Tax Directive was introduced from 1 July. The implications of this are that income earned on bank accounts in one EU member state will be reported to the tax authorities in another EU state. So, for example, a British resident with a bank account in Spain will find that details of any income earned on it will be disclosed to HMRC. Whilst the Channel Islands and the Isle of Man are not EU members, they are also caught by the directive, but in their cases account holders have the option to elect whether details of income are passed to HMRC or pay a withholding tax.
With this in mind there have been calls from some quarters to have a tax amnesty, which would enable UK citizens with funds hidden offshore a limited opportunity to “repatriate” their funds with minimised sanctions. Such amnesties have been held in other EU countries such as Germany, Italy and Ireland. An amnesty would seem to be a sensible move, but it is doubtful that we will have one in the UK, as there is opposition from HMRC and politicians. With the amount of intelligence being provided to the authorities there is very little an account holder can do with the funds except stare admiringly at his statements. Even without a tax amnesty the avenue of voluntary disclosure is still available to those wishing to repatriate funds. Voluntary disclosure has positive benefits including lower penalties but there are pitfalls and appropriate professional advice should be sought.
Managing Investigations
If individuals, and their advisors, are to minimise the trauma and cost of an HRMC investigation they need to take expert advice. It is only by working with experienced tax professionals with real experience of HMRC processes and policies that the risks associated with tax evasion – even if unintentional – can be mitigated.
Leveraging this expertise can reduce the time taken for an investigation and significantly diminish the chances of criminal prosecution – unless the crime falls into the specific categories under which HMRC must prosecute, such as the use of false invoicing. For HMRC, the goal is to recover as much unpaid tax as possible, in the shortest time and using minimal resources; the agency is therefore keen to work with experts who understand the implications of tax evasion to rapidly negotiate an appropriate solution.
The thought of a tax investigation will always strike fear in the heart of even the most law abiding citizen but as the government’s tax evasion policy gains momentum it is a reality that will affect an increasing number of both individuals and professional advisors. Understanding the role professional tax experts can play in assuaging the pain of the investigation will become ever more important as the targets for recouping unpaid tax fast approach.
Paul Noble is an Assistant Director at Vantis Tax, Investigations and Enquiries.