Hmrc naming and shaming powers explained

HMRC naming and shaming those who have abused the tax system is no longer reserved for the rich and famous – as a number of salon owners have discovered. HMRC’s powers Formally known as Publishing Details of Deliberate Defaulters, HMRC has, since 2010, had the power to publish the name, address and other identifying details of taxpayers where it has carried out an investigation and charged penalties for deliberate defaults involving tax of more than £25,000. In practical terms, the only realistic way to avoid publication is to earn “maximum remission” for cooperation. As soon as HMRC start to investigate, taxpayers need to cooperate fully, hide nothing and help HMRC to understand what they did. Once a taxpayer has suffered anything but a fully reduced penalty, there is no appeal against publication, just the chance to “make representations” as to why it might not be in the public interest; unless personal safety is at risk, there’s not much chance of that. What are HMRC’s powers? The naming and shaming is just the final stage to any enquiry, whether it comes out of a compliance visit, a random enquiry into an annual return, or a targeted investigation into a taxpayer’s affairs. At some point in the process HMRC will need to open a formal enquiry if they are to establish an underpayment of tax in respect of which they can charge a penalty. Once that happens they can ask anything about a taxpayer’s tax affairs for the period covered by the returns they’re investigating. Generally they have 12 months from the date a return is submitted, although if a return is amended that restarts the clock on the enquiry window. However, there is scope for what’s known as a Discovery Assessment. This is where HMRC realise that the return was wrong after the normal window has closed. If the error was an honest mistake then as long as HMRC should have realised from the information they had at the time, they can’t revisit it to make good their own inadequacy. But if the return was deliberately, or carelessly, wrong then all they need to do is realise that there’s an underpayment in order to reopen the return. While there have been a number of cases recently where HMRC have been creative with the rules, and on a couple of occasions been forced to withdraw the notice and even pay the taxpayer’s costs, resisting a valid notice on purely procedural grounds where there is underpaid tax is going to fall outside the “cooperating fully” window. This will hurt any defence. And if there’s deliberate fraud or criminal behaviour they can go back up to 20 years, and could even extend that to “forever” where there’s an offshore bank account involved. Once HMRC have opened their enquiry and facts have deliberately been hidden and the tax at stake could be more than £25,000, the only sensible thing is for the taxpayer to cooperate. Prevaricating just because there might only £10,000 at stake for that year isn’t a good plan either, as HMRC will almost certainly look at other years too, and if the total across all the years is over £25,000 the game is over. HMRC will add up all the taxes where problems are found – if they find any suppression of takings to skim off the VAT for example, they’ll add in the corporation or income tax and NICs that should have been made on those sales too. Many businesses get caught because it’s only the takings they suppress; all the related outgoings get claimed for tax anyway, so the tax profits look suspiciously low compared to legitimate businesses. HMRC’s computers can interrogate supplier systems to check how much a taxpayer has spent – so an electrician claiming he’s bought enough cable to rewire 15 houses but only declaring his income from five is asking for trouble. It’s important to remember that across several taxes over as much as five years means that concealing as little as £5000 a year could trigger the provisions. Bear in mind too that the publication is based on the level of tax evaded which needs to be paid back, plus penalties of up to 100% of the tax. £20,000 cash in hand, probably long spent, could become a bill for £35,000, due immediately – even more if hidden offshore where the maximum penalty doubles to 200%. So what’s the risk of getting caught? It’s high, and getting higher all the time. HMRC’s Connect computer system trawls through a vast range of information, including social media sites like Facebook as well as the obvious targets of banks and credit card suppliers. It’ll cross match mortgage applications to VAT returns and the like, as well as looking out for signs that someone has been on holiday too often, or boasting online about a lifestyle that the income declared on a tax return couldn’t possibly support. HMRC’s powers are extending at every budget, and they’re getting better at targeting their compliance efforts on those whose tax returns don’t match the rest of their online footprint.  Jason Piper is technical manager for Tax and Business Law at the Association of Chartered Certified Accountants. For more informative and inspirational business news and features subscribe to HJ