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Markel Tax

12 Jan 2021

HMRC Annual Report: The key takeaways

As is the case with most of us, HMRC have also had to put processes in place for the bulk of their staff to work from home, with little or no access to files or business records they have been working on.  This, together with the introduction of the business support schemes, resulted in a pause in compliance activity during the first lockdown period with enquiries starting to recommence around mid-late July. 

It’s fair to say that since the recommencement of compliance activity, HMRC have taken a rather softer approach in most cases with a relaxed view on deadlines and extensions which, of course, many have welcomed. 

Unfortunately, we have encountered HMRC delays in a number of cases which, although expected, in some cases these delays extend to before the lockdown period and appear to have been exacerbated by the situation in recent months. 

What we can say is that compliance activity is increasing and we have seen a return to more normal compliance activity in the last few months.  Even during the pause period last year, HMRC were still very mindful of the time limits for opening an enquiry or raising assessments and were careful not to miss the boat on this by issuing the relevant paperwork on time.

HMRC Annual Report 2019 – 2020: what were the main takeaways?

Let’s have a look at some of the figures in HMRC’s Annual Report and see what we can take from these.

The tax gap

One of the headline figures is in relation to the tax gap, which is the difference between the amount of tax that should, in theory, be paid to HMRC and what is actually paid.

The gap is essentially an estimate, however, looking at the latest figures available in the tax year 2018 to 2019, the estimated tax gap is 4.7% which is equivalent to £31 billion of the total theoretical tax liabilities.  This means that HMRC secured 95.3% of all tax due.

The tax gap has fallen from 7.5% in 2005/2006, showing a long-term downward trend and it would be reasonable to consider that part of this downward trend is largely down to HMRC’s greater use of information during this period leading to a more focused approach to compliance activity. 

That’s not to say that every enquiry conducted by HMRC results in tax being due, it is a checking mechanism at the end of the day and just because HMRC think that something may be amiss that is not necessarily the case but these situations still need to be addressed.

The report states that while the vast majority of customers pay the correct amount of tax, some make simple errors or do not take enough care in calculating the tax that they owe. A tax gap also results from differences in legal interpretation, avoidance, evasion and criminal attacks on the tax system and we’ve also seen plenty of activity in some of these areas.

To ensure that the correct tax is paid every year, we know that HMRC take action to seek to collect the correct tax from all taxpayers.  They do this by way of formal enquiries which can be time-consuming, stressful and costly which is why it is vitally important to have fee protection insurance to cover the costs of a tax investigation instigated by HMRC.

HMRC’s approach to enquiries has been a risk-based, information-led process for a number of years now, in their words “underpinned by cutting-edge data analysis to identify where tax is most at risk of not being paid” and this has generally led to tailored, targeted and proportionate interventions.

The report states that it’s important for individuals and businesses to know that HMRC’s activity covers all parts of the economy impartially and, from the cases we deal with, we do see a wide spread of enquiries instigated into client’s affairs, sometimes these are only into one or two specific areas of a Return but on other occasions this is much more intensive and detailed. For example, when HMRC commence a cross-tax enquiry, where we know that this will be a much more detailed review into all aspects of the business under enquiry.

Specific target areas

We’ve zoned in on a couple of specific areas within the report as we have seen lots of activity by HMRC in relation to these areas over the last few years.

Firstly, what HMRC describe as “wealthy individuals” which are said to be c.700k.

The compliance yield from this group is estimated at £2.2 billion within the report.

These wealthy individuals often have complex tax affairs covering multiple different taxes.

In 2019 to 2020 they were defined as having incomes above £200,000 or assets above £2 million in any of the last three years.

We’ve been involved in a number of these cases where HMRC’s approach has quite clearly been to seek to gain a thorough understanding of an individual’s tax affairs in some cases going back many years requesting lots of historical information on, for example, properties held and how these were initially financed. 

We fully understand that HMRC have the right to open enquiries and seek information relevant to the period under review and will always seek to co-operate with HMRC on these matters.  However, where the request for details and information falls outside of the period of the review, it’s important to seek to establish why HMRC feel this is wholly justified. 

It’s always important to speak to clients at the outset of any enquiry to ensure that there are no issues to be disclosed to HMRC so that these are properly addressed where appropriate.  It is also important and perfectly reasonable to challenge HMRC’s requests for information where this is necessary. 

If we consider the scenario of  an enquiry notice into 2018/19, this does not give the automatic right to ask for details and information for any other tax years where the enquiry window has closed without good reason.

Speaking from recent experiences where we have challenged HMRC’s position, HMRC have reconsidered their requests  enquiries  have  been brought to a relatively swift conclusion.

Moving on to mid-sized businesses, we have again seen a lot of focus on these businesses with a joined up approach by HMRC with a Case Lead controlling cross-tax enquiry cases which encompasses Tax, VAT and Employer Compliance matters.

Mid-sized businesses make up less than 5% of UK businesses.  HMRC state that some are growing rapidly making their tax affairs increasingly complex. In 2019 to 2020 they were defined as having a turnover between £10 million and £200 million or 20 or more employees.

The compliance yield from this group is estimated at £5 billion within the report.

HMRC enquiries of this nature are extensive and time-consuming. In one recent case, we saw HMRC instigate enquiries into five separate companies which are linked, along with the associated directors also being subject to S9a enquiry notices.  When questioned, HMRC stated that there was no specific reason for the enquiry which seems unlikely given the extensive nature of the enquiries instigated and this matter is still ongoing with further discussions due to take place.

These cases inevitably mean that HMRC will request the private bank statements for the directors together with a detailed summary of the bank accounts held right at the start of the enquiry for the purposes of checking that everything is in order.  This is before HMRC have had sight of any business records or established any concerns from a business records review and early dialogue with HMRC in these cases is certainly recommended to agree a sensible and proportionate approach to the enquiry process.

There has been somewhat of a sea change in this area in recent years with HMRC much more intent on making these requests at the outset of enquiries.

Again this is an area where we can give advice and guidance on how best to proceed.

HMRC’s Charter

The report includes a section on working with agents and intermediaries with HMRC’s Charter in focus. 

When dealing with HMRC enquiries, it’s really important to keep in mind HMRC’s Charter which sets out the standards of behaviour and values that customers can expect.

The new Charter reflects feedback received from stakeholders and was published very recently replacing the previous Charter.

There are seven key headings within the new Charter, as follows:

  1. Getting things right

    • We’ll give you accurate, consistent and clear information. This will help you meet your obligations, and understand your rights and what you can claim. When we ask for information, we rely on you to give us full, accurate and timely answers. If you disagree with us, we’ll tell you about options available to you and work with you to reach an appropriate outcome quickly and simply.

  2. Making things easy

    • We’ll provide services that are designed around what you need to do, and are accessible, easy and quick to use, minimising the cost to you.

  3. Being responsive

    • When you get in touch with us, we’ll make sure that the people you deal with have the right level of expertise. We’ll answer your questions and resolve things first time, or as quickly as we can. We’ll also explain what happens next and when you can expect a response from us. If we make a mistake, we’ll put it right as soon as possible. If you’re not satisfied with the service you’ve received, we’ll explain how you can make a complaint.

  4. Treating you fairly

    • We’ll work within the law to make sure everyone pays the right amount of tax and gets their benefits and other entitlements. We’ll assume you’re telling the truth, unless we’ve good reason to think you’re not. 

  5. Being aware of your personal situation

    • We’ll listen to your worries and answer any questions clearly and concisely. We’ll be mindful of your wider personal situation, and will give you extra support if you need it.

  6. Recognising that someone can represent you

    • We’ll respect your wish to have someone else deal with us on your behalf, such as an accountant, friend or a relative. We’ll only deal with them if you have authorised them to represent you. To protect you, HMRC works with professional bodies to set the standard expected of professional agents who support you to meet your tax obligations. We can refuse to work with professional agents who fail to adhere to this standard.

  7. Keeping your data secure 

    • We’ll protect information we hold about you and treat it as private and confidential. We’ll always use that information fairly and lawfully. 

The new Charter also includes a section on mutual respect which is vitally important when dealing with HMRC.  There are also details on providing feedback and how to complain when these standards have not been met.

It’s important to note that the HMRC Charter is a legal requirement and these are the standards expected from all HMRC employees.

The future of HMRC 

HMRC has been moving towards having 13 regional centres with 12 sites secured, nine centres being built and fitted out, and three already open in Croydon, Bristol and Belfast.

This has been in progress for some years with the loss of the local tax office presence, however HMRC’s compliance activity has carried on throughout this period and is simply conducted in more centralised way.

Given the current climate, we would expect that enquiries will continue to be conducted in a more remote fashion with email correspondence, telephone calls, conference calls and virtual meetings replacing any face to face contact.  Clearly, visits to business premises and face-to-face meetings are unlikely to be taking place any time soon but as soon as it is safe to do so, we would expect HMRC to return to the more traditional way of working enquiry cases perhaps with some new ideas and processes in place to avoid unnecessary travel and meetings - only time will tell!

On the horizon we can see from the report that HMRC are committed to extending ‘Making Tax Digital’ for VAT and introducing this to Income tax self-assessment for business and landlords with income over £10k which is planned from April 2023.  There will also be a consultation on extending this to Corporation Tax and these are areas we will keep an eye on.

There is a general theme of improving services and modernisation in the years to come and we would all welcome this.

Conclusion

At Markel Tax we provide a range of products and services including our fee protection schemes tailored to your needs.  Our tax investigations team are involved with HMRC enquiries on a daily basis so have a wide range of knowledge and experience in these matters. 

For more information on the HMRC report findings or other related issues, call 0333 305 3667 or contact James Cordiner.

Tagged HMRC
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