In 2017, a Government report revealed some of the reasons behind tax evasion.
Of the 45 people interviewed, some believed the risk of detection to be low, while others expected any fine incurred likely to be outweighed by the financial gain that comes from breaking the rules.
To paraphrase, there is certainly a degree of “everyone’s doing it, so no one cares” running throughout the report, but its conclusion offers a stark warning for any would-be tax evaders.
HMRC is clearly concerned about the lack of understanding surrounding tax evasion consequences. As suggested by the report, it realises it needs to improve that understanding and identify “the right levers to pull to tap into what matters most to evaders”.
So, should you be worried if you’re not certain that you’re above the board?
How often do HMRC investigate tax evasion?
HMRC understandably guards the figures relating to the likelihood of an investigation closely, but while this mystery is enough to encourage most people into lawful tax practices, there are some stats from HMRC that demonstrate how active it is in this field:
- £185 billion has been collected since 2010 as the result of investigations and prosecution
- 5,000 individuals have been convicted of tax evasion since 2010, and
- HMRC is successful in more than 90% of tax evasion court cases.
Clearly, avoiding your taxes is a risky way to operate your business and the threat of a fine is a very real one, even for those who don’t mean to under pay.
It’s also important to note that HMRC doesn’t publish a list of the behaviours it looks for in tax evaders. Just like the police don’t give away the secrets of criminals, they understandably don’t want to give people ideas about how tax can be avoided!
However, there are certainly red flags. Significant turnover and profit variations and consistently low tax repayments are common examples, but if you’re running a particularly profitable business without the help of an accountant, that can also raise their suspicions.
‘Dodgy’ might be a colloquial term, but it best describes anything HMRC is looking for. If anything you do, account-wise, seems out of step with the rest of your industry, you’re more likely to be investigated.
How does HMRC look for?
Once again, we shouldn’t expect HMRC to publish details of the techniques and tools it uses to find tax evaders, but they’ve arguably never been better equipped to do so.
Connect is a powerful data analysis system that has been collecting taxpayer information since 2010. By combining data from other agencies (including the DVLA), it can identify anomalies in tax affairs – such as a company director who owns three supercars while running a minimally-profitable business.
Despite these high-tech tools, the old-fashioned approach is still in effect. Unhappy neighbours and tip-offs from friends or employees are whistleblowing tactics still relied on by HMRC. If you’re going through a big area of change in the business then do please give us or your accountant a call if you’re concerned that the activity might look unusual.
The hidden cost of tax evasion
Beyond the penalties that come when you fail to pay the right amount of tax, there’s a cost that’s much harder to quantify but which can be equally harmful to your business.
The time it takes to deal with an investigation is usually considerable, thanks to the number of queries you’ll have to deal with from inspectors. And then there’s your accountant, who will probably have to play a significant role in the proceedings and charge for their time accordingly.
This is why tax investigation insurance packages are now available and serve to help businesses that encounter long, unexpected investigations into their affairs.
How does Making Tax Digital impact on this?
The first stage of Making Tax Digital (MTD) came into effect on 1st April 2019 and aims to make business accounts more transparent.
Businesses above the VAT registration threshold (£85K) are the first that need to comply with MTD, and while every single transaction isn’t expected to be sent to HMRC in real-time, they do need to be recorded in the event of an investigation.
If you’re a law-abiding business that chooses to do the right thing, there’ll even be an option eventually for you to submit more detail voluntarily. And that begs the question: if you choose not to, does it look like you have something to hide?
Worried? Talk to us!
Tax avoidance isn’t always a malicious or even conscious decision, and if you’re worried that some of your business’s past practises might have fallen foul of HMRC’s rules, it’s a good idea to talk to someone.
Your accountant should always be your first port of call in such circumstances. As we’ve hopefully demonstrated, tax evasion simply isn’t worth it, and even if you’re not trying to, the complicated tax system can often slip you up.
Guidance from an expert (like us) will help alleviate any stress and get you on the right side of HMRC. Who, contrary to popular belief, will actually work with us and you should there be a problem that you alert us to.