The enquiry selection process is underpinned by risk. HM Revenue & Customs (HMRC) risk assesses individual tax returns, it risk assesses business sectors and it even risk assesses geographical areas of the UK. The objective of the risk assessment is to determine whether there is a potential loss of tax or VAT which needs to be investigated further.
The Risk and Intelligence Service within HMRC brings together all of the data the department receives and feeds it into Connect, the taxman’s award-winning computer software programme, which then integrates all the information for tax specialists to interrogate.
Apart from all the detail banks and building societies and other Government agencies provide to HMRC, reports to the Tax Evasion Hotline and mortgage referrals also form part of the risk assessment process.
Tax Evasion Hotline
HMRC receives letters, emails and telephone calls from people who suspect somebody else is not declaring all of their income.
It is not unusual for jilted partners, wives or husbands, jealous neighbours or disgruntled former employees to contact HMRC with stories of undeclared income or to question how expensive cars or home extensions have been paid for. Whether true or not, all of these reports are entered into Connect and become part of the risk assessment process.
Mortgage Verification Scheme
Mortgage lenders contact HMRC when they have cause to doubt the level of income being declared on mortgage applications. HMRC check the referrals and either confirm or deny the income.
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If the income declared on the mortgage application is more than the income declared on the tax return, then that can trigger an enquiry too.
Undeclared rental income is fertile ground for HMRC.
The Land Registry provides property transaction details, including purchase and sale prices, which HMRC checks against Voters List entries. If the Voters List points towards a property being occupied by several people, all with different surnames, HMRC knows the property in question is likely to be owned by a landlord. A check to see whether housing benefit is being paid to anyone in the property is checked next, before the decision is made to begin a tax enquiry.
HMRC has always been suspicious about subcontractors, mainly because of the potential to earn cash but, more recently, due to the level of expenditure claimed against the income declared.
In a change of tactic, HMRC approaches firms of accountants who prepare and file large numbers of tax returns for subcontractor clients and asks to review a sample of their work. HMRC calls these accountants High Volume Agents (HVAs).
The review focuses on the business receipts the HVA has seen and the decisions made regarding use of home and travel expenditure claims in particular. With subcontractors generally on site all day, HMRC officers frequently challenge what work is being done at home or when it is being carried out. Journeys back and forth from home to site are also contested and argued to be habitual in nature and disallowable, if the same trips are being repeated on a regular basis.
HMRC will invite subcontractor clients of the HVA to participate in a voluntary amendment programme, where adjustments are agreed if some of the expenditure claimed is questionable. Favourable terms are offered, with adjustments restricted to two years and no penalty charged.
However, if the subcontractor does not agree to the voluntary adjustment, HMRC then proceeds to open enquiries into those who have refused, pursues as many years as possible and levies financial penalties on top of any extra tax and interest.
Tasked by the Government to maximise revenue, HMRC is doing just that, bringing in an extra £10.3bn a year from compliance activity compared to just five years ago. The last full financial year saw HMRC deliver a record £28.9bn in 2016/17 compared to £18.6bn in 2011/12.