The risks of a tax investigation


Humans are bad at assessing risk. We’re terrified of plane crashes or being bitten by a poisonous snake, but relaxed about things that are statistically more likely to harm us.

The likelihood of HMRC investigating your business’s tax affairs seems to be a particularly difficult risk to quantify.

Why take the chance?

In 2017, the Government interviewed 45 people known to have engaged in deliberate tax evasion.

Some judged the risk of detection to be low, and assumed evasion would be hard to prove, or thought any fine they did incur would be outweighed by the financial benefits of bending the rules.

Others were emboldened by a belief that “everybody does it, and nobody cares”, while some assumed they would be able to use the gift of the gab to talk their way out of prosecution.

The report recommended raising the perceived threat level to deter would-be evaders, particularly if people think the chances of being investigated, prosecuted and fined by HMRC are low.

How likely is an investigation?

The Revenue guards this information closely as it doesn’t want people to know exactly how likely an investigation is, or what the triggers might be.

As with most law enforcement, its work depends on the fear of being caught as much as on actual prosecutions.

There are some statistics that HMRC is willing to share, however, which give a sense of its activity:

  • Since 2010, it has secured £185 billion in extra tax through investigation and prosecution.
  • It’s successful in more than 90% of criminal cases it brings to trial, and in 2018 secured more than 830 criminal convictions for tax and duty fraud – more than 80% of those charged.
  • Since 2010, HMRC investigations have resulted in more than 5,000 individuals being criminally convicted.

There’s no way to know what percentage of people who evade tax or duty is represented in those figures, but what’s clear is that it’s by no means risk-free.

IR35 investigations

Compliance with IR35 legislation is a real focus for the Revenue, as the Government bids to crack down on what it perceives as ‘disguised employment’ among contractors and freelancers.

In 2009/10, there were only 12 ‘enforcement actions’ as HMRC calls them, yielding £155,000 – but that soon ramped up.

Tax year Yield  IR35 inquiries/enforcement actions
2009/10 £155,000  12
2010/11 £219,000 23
2011/12 £1.2m 59
2012/13 £1.1m 256
2013/14 £430,000 192

Source: HM Government

After 2014, information dries up because, as the Revenue explained in response to a freedom of information request in 2016, “by disclosing numbers of enquiries… HMRC is at risk of inadvertently providing people with the means of identifying coverage rates”.

What triggers investigations?

While the Revenue doesn’t publish a big list of behaviours it looks out for, there are certain red flags.

High variation in turnover or profit from year to year is one example. Consistently paying little or no tax is another.

If your business is substantial and profitable but you are still managing your own accounts rather than working with an accountant, that can also raise suspicions.

Anything that seems out of the ordinary or out of step with the norm for your sector or region will at the very least prompt further scrutiny.

Supercomputers and whistleblowers

Since 2010, HMRC has used a powerful data analysis system called Connect to pull in and cross-reference vast amounts of information on taxpayers.

It uses data from other government agencies, such as the Driver and Vehicle Licensing Agency (DVLA) as well as online auction and car trading websites, to identify anomalies.

Collating all that data may highlight someone reporting minimal profit from a business in a generally profitable sector, while at the same time whizzing about in flashy cars.

On the other hand, many investigations are the result of something less high-tech: tip-offs from disgruntled neighbours, friends, relatives or former employees.

In 2017/18, HMRC’s tax fraud hotline received 40,000 calls – and informants netted more than £340,000.

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