You may or may not know that...
HMRC have significantly increased the number of tax investigations they carry out.
Not only that...
HMRC's "breakthrough" computer system, a new, powerful weapon against fraud, tax evasion and avoidance, will ensure that even the most determined are caught eventually.
The system is called as 'Connect', and was designed by defence contractor BAE Systems. Although it cost HMRC £45m back in 2010, it has already delivered £1.4bn of additional tax revenues.
So given all of this we thought it would be helpful for you to have the information contained in this article to save you from getting into bother with HMRC.
We think it best to be prudent because...
You may never have had an HMRC tax investigation, but given the government have put HMRC under pressure to collect more tax revenues than ever before, the chances are the even the most careful of Self-Employed/MD Owners will come under HMRCs microscope at some point.
The HMRCs powerful tax inquiries computer system is called 'Connect'.
It's a very appropriate name because...
HMRC has unrivalled wealth of information about people living in Britain, due in part to its many connections with other databases, such as the Land Registry, Companies House and the Electoral Roll. "HMRC has more data than the British Library"
Not only that...
The HMRC website is one of the world's biggest websites at peak filing time.
'Connect' has access to such comprehensive data that it allows investigators to spot anomalies.
HMRC's powerful IT system allows Tax Inspectors to build up literally dozens of connections for any one individual. Creating a unique profile about that persons circumstances.
HMRC gets information from other organisations
The tax authority's access to Land Registry and DVLA data means it knows how much someone has spent on their house and can see vehicles registered to each address.
So, if someone has bought a high value vehicle, but lives in a modest flat that might not fit with that individual's financial affairs.
Maybe an individual owns some properties in their name, but has not declared any income, that would be a warning sign.
The Inland Revenue can easily build up a picture of someone's financial worth and means that if someone is only declaring £20,000 a year, but is living a £100,000 lifestyle, HMRC can call on that individual to pay more.
HMRC also grabs seemingly harmless information from social networking sites such as Facebook, Twitter and LinkedIn.
If someone is constantly putting up pictures of expensive holidays and flashy cars on Facebook, but is paying minimal tax, then that could trigger an investigation.
HMRC also obtains information from less obvious sources, such as adverts on noticeboards, in newsagents or even stories in local newspapers.
"Fear and guilt on TV, Radio and Billboards"
The tax authorities advertising campaigns are designed to make tax evaders feel rotten about cheating the Exchequer when times are hard.
Ad campaigns emphasise that "the net is closing in". The latest adverts warn tax cheats to declare all their income "before it is too late".
Apart from powerful computing systems, and the ability to gather huge amounts of electronic information, the tax authorities also use these tactics……..
Tax inspectors also now operate undercover, in disguise, and in teams to root out suspicious behaviour.
Informers and tip-offs…
Embittered divorcees and disgruntled former employees are among HMRC's sources of useful information.
Overseas property owners….
Higher-rate taxpayers with properties abroad are among those targeted by the 200-strong HMRC affluence unit. This affluence unit has been set a target of raising an extra £560m over the next four years.
As well as overseas property, other investigations involve commodity traders and people holding offshore accounts.
Offshore bank accounts….
In-line with the above, International borders are increasingly meaningless for tax authorities pursuit of outstanding taxes.
In certain circumstances, inspectors now have the power to raid the homes of people they suspect of not paying tax.
Raids last year were 155% up on the previous year. These property searches, tend to focus on individuals who run their businesses from home
The "chi squared" test is another tool sometimes used by tax inspectors to check the reliability of reported figures, including restaurants' sales figures. This test, also known as 'Benford's Law', is a means of testing the randomness of figures.
Basically if numbers are made up, or appear to have some honest anomalies, there is a very good chance that HMRC will spot it and investigate.
It goes without saying that instructing a quality accountant is a must.
However HMRCs powers have increased significantly over the past couple of years, and that is set to continue. So even with a good accountant on your side, an investigation can be very stressful, intimidating and take up so much of your valuable time.
We recommend taking out 'protection insurance'.
We offer our clients insurance against the accountancy/legal costs of HMRC investigations.
We will provide up to £75,000 (through our insurer) in respect of fees incurred by us attending meetings with HMRC or responding to correspondence from HMRC when you are subject to an HMRC check, enquiry, visit, meeting or dispute.
Best Wishes and Success