One of the worst fears of any business is to receive a letter from an officer of HM Revenue & Customs enquiring into the accuracy of the individual’s tax return and the accounts of the business.  HMRC’s work programme in this respect falls into three basic categories: the smaller end of the enquiry work is carried out by Local Compliance offices, whereas the more complex and serious enquiries are carried out by offices of the Civil Investigation of Fraud offices.  There is a third leg which stands on its own, which is responsible for the conduct of criminal investigations with a view to prosecution.

The twenty-seventh HMRC Report submitted in March 2011 to the House of Commons Committee of Public Accounts concludes that over the last three years, the Department has increased yield whilst reducing costs through better targeting of its work.  Over the next four years, the Department is aiming to raise around £18 billion per annum from increased efforts to tackle fraud, evasion and debt.

In the year 2009-10, HMRC collected altogether £435 billion in taxes, noting that while most taxpayers comply with the law, a tiny minority deliberately evade their obligations.  In the year 2008-09, the gap estimated by the Department between tax payable if all obligations were properly met, and tax actually collected, was some £42 billion; this is just under 10 per cent of theoretically correct tax receipts.  More significantly, not included in the figures is an additional £15 billion collected via the Department’s compliance activities to tackle fraud, evasion and criminal activities.

Increased funding, increased prosecutions

Therefore, despite the current prevailing practice of implementing various “cuts”, the Chancellor decided recently to allocate some £900 million to HMRC to tackle compliance.  One significant impact of this to be felt in the coming financial year is HMRC aiming to divert some 180 Inspectors from serious civil investigations to criminal investigations.  In the year 2011-12, the Department is aiming to increase the number of prosecutions for tax offences from the current level of 200 cases per year to 1,000.

The level of compliance activities in HMRC is set to gather momentum rapidly.  It is expected that HMRC will be making further regular announcements to entice people from different walks to come forward and make a voluntary disclosure regarding their unpaid taxes.  First, there was the amnesty given to doctors and dentists to notify their intention to make a disclosure by 31 March 2011, and earlier that month it was announced that plumbers and heating engineers are being offered a similar amnesty until the end of May 2011.

Amnesty facilities

HMRC can easily afford to be generous with its various amnesty programmes given the huge volume of very useful and damning information that it now holds in its “intelligence bank”.  It is well known, for instance, that the department holds very valuable and extensive information on people holding offshore accounts; this also includes information obtained from Swiss banks who until recently were known for their strictly secretive codes of practice.  However, with the arrival, first, to the Statute Book of the Proceeds of Crime Act in 2002, followed by the European Union Savings Directive in 2005, hiding money is no longer an attractive and easy option to contemplate for anyone.  Indeed, in a political philosophy which promotes the concept of Big Society, it can be said that the “Big Brother with Big Eyes” is not too far either away, watching it all happening and waiting to pounce.  If anyone ignores HMRC’s “Big Carrot” approach , then the Big Stick will get you and any unpaid liabilities will attract sizeable penalties, in addition to the dreaded risk of being prosecuted in more serious cases.

As regards the unfortunate people holding undisclosed offshore assets, there have been three amnesties - the first, the Offshore Disclosure Facility in 2007; then the New Disclosure Facility in 2009: and now the Liechtenstein Disclosure Facility available until March 2015.  Apparently less than 50 per cent of the known account holders have chosen to make a voluntary disclosure.  With the tightening of investigation activities within HMRC, it is important that everyone affected should now urgently take stock of their position.  A “head in the sand” approach is simply too dangerous to continue.

Damage limitation

A tax investigation can be a harrowing experience, especially if the enquiry drags on.  The disclosure must include all taxable income and gains not previously disclosed: that means from all sources within and outside the UK.  HMRC will be looking for cases where the nature and the amount of the offshore income suggests UK profits might have been missed and these cases will produce significant investigations.  It is most important to pause for thought before signing any final disclosure certificate, the critical document required of a taxpayer at the time of reaching a settlement with HMRC.  Prosecution cases can result from such documents being proved false.

An experienced advisor will always be able to defuse any traumatic situations, as well as use their expertise to make use of any technical opportunities which might be afforded, for example, by a proper consideration of the complex rules relating to residence and domicile.  In a fast moving technological age, gone are the days when the simplistic rules concerning where one is resident at the stroke of midnight are no longer applicable.  The subject becomes ever more complicated and even HMRC’s own literature for the lay public is now contained in hundreds of papers, as opposed to the previous booklet, IR20, which was no more than some 8-10 pages.  These highly technical matters are key to determining liability in individual, corporate and trust situations.  Then again, in these credit crunch times, experience suggests that HMRC can be flexible in negotiations, both in arriving at taxable income figures and in agreeing final settlement figures.  Good representation will therefore make the difference here.

Experienced professional representation is vital.  In even a relatively small case, assembling and interpreting all the relevant material and calculating the liabilities can be difficult enough.  But with many currencies to deal with, unfamiliar investment vehicles, double taxation issues and withholding tax to consider, taxpayers and inexperienced practitioners can easily be out of their depth.  Experienced agents could well save their costs in advantageously negotiated settlements, in addition to removing the stress inevitably caused to the subject of a tax investigation.

Noshir J Avari is the principal of Avari and Associates, Tax Investigation Consultants.  He served the Inland Revenue Department for 20 years before setting up Avari and Associates in July 1988. For more information visit www.avariandassociates.co.uk