Paying tax: Bending the rules could prove costly

Other people’s tax affairs seem to be constantly in the newspapers these days — just ask Take That’s Gary Barlow, Georgian-British singer Katie Melua or comedian Jimmy Carr.

They have had their uncomfortable moment in the spotlight and their tax position is now just a fading news story. Every three months, however, another group of taxpayers hits the news for no reason other than blemishes on their tax record.

Many are just ordinary members of the public, but the one thing they all have in common is that they’ve been “named and shamed” by HMRC as a number of those in the drinks trade have found out to their cost. Consider, for example, the situation of the Cue Club St Albans Ltd, a licensed club in Upper Dagnall Street, St Albans. It was fined £16,362 on unpaid tax of £28,333 during the period from March 2012 to June 2013.

And then there’s Mrs TM Martin, a publican of Duke Street, Formby, who found herself paying £47,312 on evaded taxes of £70,093 for the period from April 2010 to April 2013. And, according to HMRC, there are plenty more that could be used to illustrate the point.

Naming and shaming

Formally known as Publishing Details of Deliberate Defaulters, HMRC has, since 2010, had the power to publish the name, address and other identifying details of taxpayers where it has carried out an investigation and charged penalties for deliberate defaults involving tax of more than £25,000.

In practical terms, the only realistic way to avoid publication is to earn “maximum remission” for co-operation. As soon as HMRC starts to investigate, taxpayers need to co-operate fully, hide nothing and help the authorities understand what they did.

There’s no chance of “doing deals” later — a solicitor tried that recently and came doubly unstuck. Not only did he lose his attempt to appeal against HMRC, but the related publicity (before the naming and shaming) brought him to the attention of the Solicitors Regulation Authority as well.

Once a taxpayer has suffered anything but a fully reduced penalty, there is no appeal against publication, just the chance to “make representations” as to why it might not be in the public interest; unless personal safety is at risk — and there’s not much chance of that.

What are HMRCs powers?

The naming and shaming is just the final stage to any enquiry, whether it comes out of a compliance visit, a random enquiry into an annual return, or a targeted investigation into a taxpayer’s affairs.

While it’s important that HMRC investigators get their procedures right, taxpayers should bear in mind that if they’ve anything serious to hide, they don’t want to antagonise HMRC because the defence against naming and shaming will evaporate.

At some point in the process, HMRC officers will need to open a formal enquiry if they are to establish an underpayment of tax in respect of which they can charge a penalty.

Once that happens the investigators can ask anything about a taxpayer’s tax affairs for the period covered by the returns they’re investigating. Generally they have 12 months from the date a return is submitted, although, if a return is amended, that restarts the clock on the enquiry window. However, there is scope for what’s known as a Discovery Assessment.

This is where HMRC realises that the return was wrong after the normal window has closed. If the error was an honest mistake then as long as HMRC should have realised from the information they had at the time, they can’t revisit it to make good their own inadequacy.

But if the return was deliberately, or carelessly, wrong then all HMRC officers need to do is realise that there’s an underpayment in order to reopen the return. While there have been a number of cases recently where HMRC has been creative with the rules, and on a couple of occasions been forced to withdraw the notice and even pay the taxpayer’s costs, resisting a valid notice on purely procedural grounds where there is underpaid tax is going to fall outside the “co-operating fully” window. This will hurt any defence.

And if there’s deliberate fraud or criminal behaviour, HMRC can go back up to 20 years, and could even extend that to ‘for ever’ where there’s an offshore bank account involved.

Co-operation policy

Once HMRC has opened its enquiry and established that facts have deliberately been hidden and that the tax at stake could be more than £25,000, the only sensible thing is for the taxpayer to co-operate.

Prevaricating just because there might only be £10,000 at stake for that year isn’t a good plan either, as HMRC will almost certainly look at other years too, and if the total across all the years is more than £25,000, the game is over.

HMRC will add up all the taxes where problems are found — if they find any suppression of takings to skim off the VAT for example, they’ll add in the corporation or income tax and NICs that should have been made on those sales too.

Many businesses get caught because it’s only the takings they suppress; all the related outgoings get claimed for tax anyway, so the tax profits look suspiciously low compared to legitimate businesses.

HMRC’s computers can interrogate supplier systems to check how much a taxpayer has spent — so an electrician claiming he’s bought enough cable to rewire 15 houses but only declaring his income from five is asking for trouble.

It’s important to remember that across several taxes, during as much as five years, concealing as little as £5,000 a year could trigger the provisions. Bear in mind too that the publication is based on the level of tax evaded which needs to be paid back, plus penalties.

With penalties of up to 100% of the tax, by the time HMRC has made an account for the VAT that should have been collected, and the income tax and NICs that should have been paid, a taxpayer can end up worse off than if they’d never made the money in the first place.

£20,000 of cash in hand, probably long spent, could become a bill for £35,000, due immediately — even more if hidden offshore where the maximum penalty doubles to 200%.

Assessing the risks

So what’s the risk of getting caught? It’s high, and getting higher all the time.

HMRCs Connect computer system trawls through a vast range of information, including social media sites like Facebook as well as the obvious targets of banks and credit card suppliers.

It’ll cross match mortgage applications to VAT returns and the like, as well as looking out for signs that someone has been on holiday too often, or boasting online about a lifestyle that the income declared on a tax return couldn’t possibly support.

HMRC’s powers are extending at every budget, and its investigators are getting better at targeting their compliance efforts on those whose tax returns don’t match the rest of their online footprint.

Jason Piper is technical manager for Tax and Business Law at the Association of Chartered Certified Accountants.​