During the last few years HMRC has adopted a new approach to the collection of evaded tax. It has also implemented some very extensive enquiry and information powers. These powers, coupled with the new investigative approach, are there to facilitate the drive towards the tax yields demanded by the UK Government in coming years. These are the biggest changes I have seen in the 20 years I have been involved in tax investigation and compliance work.

The National Audit Office report published last year confirmed that HMRC, through its civil investigations, had collected £8.5bn in 2009/10 (an increase of 49% on 2007/08). However, in an attempt to close the estimated £35bn tax gap (2009/2010 report), HMRC has targeted to increase the tax take on civil investigations each year up to a level of £15bn by 2014/15.

This is to be achieved despite cuts to the Department as a result of the Comprehensive Spending Review – but interestingly out of the savings the Government has confirmed, HMRC have been allocated approximately £900m to spend specifically on the fight against avoidance and evasion.

In a recent statement the Exchequer Secretary to the Treasury, David Gauke, said:

• “The Government is committed to tackling tax evasion and avoidance across all areas of the economy. That is why we allocated HMRC £917m to reduce the tax gap over the next four years in the last Spending Review.
  
  “With HMRC's increased capability and expertise, and its increasing success in tackling evasion both at home and offshore, the message is clear: there is no hiding place for tax cheats.”

So what are these new powers and approaches being adopted by HMRC?

• Real-time enquiry powers allowing easier use of information notices and power to enter business premises to review records.
• Tougher penalties for non-compliance for years 2008/09 onwards – potentially doubled for offences involving offshore evasion for years 2011/12 onwards.
• A Single Compliance Process enabling HMRC to review all areas of taxation in one single enquiry based on its risk assessment of the taxpayer.
• Managing Deliberate Defaulters Unit (MDDU) used for increased scrutiny of tax defaulters who have been charged a penalty with “deliberate” behaviour. The additional monitoring could last up to five years.
• Naming and shaming of uncooperative tax defaulters.
• A proposed new Contractual Disclosure Facility process to strengthen a perceived watering down of the investigation of cases of suspected serious fraud under Code of Practice 9.
• Sustained attack on offshore bank accounts with increased use of information obtained from banks.
• Continued use of Disclosure Facilities.
• Proposed ‘Working with Tax Agents’ legislation to increase interaction between HMRC and Agents, including the investigation of and potential for levying of penalties on those classed as ‘dishonest’.
• A continued attack on areas involving tax planning, non-residents and non-domiciled individuals.

The message from HMRC is that new information and powers will be used regularly and enquiries completed in a far shorter time scale.

A common theme throughout these new powers and approaches by HMRC involves the taxpayer changing their behaviour to avoid ongoing monitoring post-enquiry, and provide full cooperation and access to resolve enquiries mitigating significantly higher penalties for years 2008/09 onwards.

Continued Attack on Avoidance

It is safe to say ‘avoidance’ remains a dirty word within HMRC and the constant propaganda against tax planning continues unabated. This has created an uncertainty and a loss of appetite in clients and investors alike. HMRC has shifted the mindset against tax avoidance by a concerted effort of prolonged disruption and costly litigation.

The Disclosure of Tax Avoidance Schemes too has had an impact on tax planning [see tax.point July 2010]. Latest published figures suggest HMRC has felt it necessary to make less legislative changes as a result of DOTAS notifications and overall fewer schemes are being disclosed.

HMRC's stance is also supported by a worldwide crackdown on tax avoidance and evasion, with the US a key player. The significant pressure and heavy fines witnessed in the US on high-profile Swiss banks is clear evidence of their commitment to the fight.

In addition to the DOTAS obligations and increased legislation and litigation, a further aide to HMRC's success in reducing participation in tax avoidance schemes is the worldwide financial crisis. As we are all well aware, two direct consequences of the economic downturn are: less income or profit to be sheltered; and a client with knowledge of HMRC's disruption strategy less willing to risk the costs of undertaking planning when the money to pay those costs has been much harder to earn in the first place.

This is not to say tax planning is completely off limits, especially with a 50% higher rate of income tax potentially payable, but more than ever it should be carefully considered: it should be right for an individual client and it should be correctly implemented and well documented. In the current climate, the client (and adviser) should be under no illusion a full HMRC enquiry is likely to follow and they should be prepared!

Disclosure Facilities

In the past four years HMRC has launched a series of voluntary disclosure facilities with varying success, all designed to raise much needed cash for the Exchequer with minimal input from HMRC.

Firstly, the Offshore Disclosure Facility (ODF) in 2007 raised £400m with spin-off enquiries expected to raise a further £100m. Then the New Disclosure Facility (NDO) in 2009 raised £85m. Both these facilities centred on offshore accounts and the information HMRC obtained from UK banks. HMRC are suggesting the follow up to these campaigns (still very much under way) will be several thousand more enquiries and a number of criminal investigations.

These initial facilities were followed up with the Tax Health Plan (THP) in 2010 marking a change in tack from HMRC as this campaign targeted a particular profession (medics). This facility produced over £10m and further enquiries yielded additional payments in excess of £1m with enquiries still under way. Another industry-specific facility was the Plumbers Tax Safe Plan (PTSP) earlier this year: less successful with approximately £328,000 collected, although to its credit, this was again a voluntary scheme, with minimal input from HMRC. Thousands of follow up enquiries may still be issued.

Although each of the facilities differs they all have a common theme: information. HMRC aggressively obtained information from banks, details of health professionals came to them and they actively sought information about registered plumbers.

Two further campaigns are currently in progress: the VAT Initiative and the Tax Catch Up Plan (TCUP).

The VAT Initiative was launched in July 2011. HMRC is using readily available information, extracting the details of unregistered individuals and businesses operating at or above the VAT threshold. HMRC has already written to 40,000 plus businesses directly to highlight the initiative.

Last month on 10 October, HMRC launched its latest campaign, the Tax Catch Up Plan (TCUP), aimed at those with either a main or secondary income from tuition or coaching, using data drawn from Section 16 information notices issued to colleges.

The intention to make a disclosure must be made by 6 January 2012 with the disclosure and payment of the tax, interest and penalties to be made by 31 March 2012.

Once again the incentive to make a disclosure is the possibility of reduced penalties of 10% for those whose action is deemed careless but not deliberate, and 20% for those whose behaviour was deliberate.

It is also worth noting HMRC has made the disclosure process relatively straightforward, providing a tax calculation tool and an online form. Once again HMRC has indicated it will pursue people it believes should be using the TCUP but who have not made a notification.

The pattern of these campaigns indicates HMRC's new aggressive approach to any area where it feels tax is being evaded. Some thought is going into the campaigns. There is a boldness to continue and it suggests new initiatives will be announced. HMRC has already indicated that it will focus on e-marketplaces and a second campaign on traders in 2012.

Liechtenstein Disclosure Facility and Swiss Accord

The agreement between UK/Switzerland was published in October 2011 and will come into force 1 January 2013.

Although incredibly significant, the Swiss agreement needs to be understood for what it is – a means for a tax levy to be paid on Swiss only bank accounts in lieu of undisclosed UK income. It is not a ‘disclosure facility’ along the same lines as the LDF, which most certainly is an all-inclusive disclosure facility.

The agreement addresses past tax irregularities but not fully and, crucially, only those assets still held in Switzerland. There is no protection from HMRC investigation and no protection from a criminal investigation, one of the many benefits that are afforded by the LDF.

The details and practicalities of the Swiss agreement are complex and in truth still being ironed out as to how it will operate in practice.

Initial thoughts are that most will favour the certainties and protection that come with the LDF rather than suffer the levy and uncertainty under the Swiss Agreement.

In terms of the LDF itself, in the right circumstances, it is without doubt a fantastic opportunity to regularise a client's tax position on very beneficial terms [see tax.point December 2010].

Nevertheless, a large portion of tax professionals are still unaware of these benefits and the circumstances under which a client could qualify. I have often heard ‘Liechtenstein? What relevance is that to my client?’ Advisers need to be aware from a ‘best advice’ position you can for example, acquire the ‘relevant property’ now, which allows an individual to meet one of the criteria for qualification. In addition, even though HMRC may have started a Local Office enquiry that enquiry can be switched into the LDF. Thereby protecting discovery, on extended time limits beyond 6 April 1999 and a reduced penalty.

Council of Mortgage Lenders

Further evidence of HMRC thinking outside the box is a new scheme to combat mortgage application fraud. The Mortgage Verification Scheme was launched on 1 September 2011 in association with the Council of Mortgage Lenders and the Building Societies Association.

The plan is for mortgage lenders to only use the scheme where they have inadequate evidence of declared income and suspect fraud. They will send HMRC relevant details from mortgage applications, using a secure electronic platform. HMRC will cross-check the income declared to lenders against information provided in income tax and employment returns and then advise lenders if the details match. Lenders will consider this when making subsequent lending decisions.

HMRC has set up a special unit to deal with requests and is planning to use this information as part of its own risk assessment process. This will provide HMRC with another tool in its search for under declared income.

Recently

HMRC has announced a new 200 strong team of investigators and specialists. The newly-formed ‘affluent’ team started work in October, bringing together experts from across the department who will be looking to identify areas where wealthy individuals are avoiding and evading taxes.

The initial focus is land and property abroad. Publicly available information has been mined to identify individuals who own property abroad. HMRC risk assessment tools are then being used to highlight those people who do not appear able legitimately to afford the property, as well as those who do not appear to be declaring the correct income and gains from the property.

Other planned work involves commodity traders and people holding offshore accounts. Much of this work will be undertaken in co-ordination with other teams from across HMRC, including those who deal with corporate entities, residence and domicile issues, and trusts and estates.

In summary, we are operating in a brave new world in relation to HMRC and tax enquiries. More than ever they are focused on the collection of cash and have some stretching compliance targets but targets they appear determined to hit.

HMRC has a mass of available information and appear better at obtaining it, where before, data was of a poor quality or poorly utilised. HMRC now has a system to identify better quality, higher yield cases to make referrals into their specialist investigation teams more efficient.

More focus, better information, tougher powers, higher penalties, increased investigations and a continued strategy of voluntary disclosure facilities. Over the past 20 years there have been many false dawns, over promises and under-delivery by HMRC. Be warned-they have upped their game and mean business.

Andrew Walker is a Director with BTG Tax

BTG Tax
43 Thomas St, Dungannon, Co
Tyrone, Northern Ireland
Tel: +44 (0)28 87720410

BTG Tax
340 Deansgate, Manchester, UK,
M3 4LY
Tel: +44 (0)161 837 1870