Tax from the Trenches: “How much does HMRC know?”

How much does HMRC know?

You may have watched a very interesting programme on TV called “Catching the Tax Dodgers”. It covered the work of various HMRC officers dealing with cases of Duty fraud, VAT fraud and a banker who had disclosed the existence of a Swiss bank account and was trying to negotiate a settlement with HMRC using one of the published disclosure facilities. It would be hard to have much sympathy for the subjects of HMRC’s scrutiny, even when officers from the Criminal Taxes unit were kicking in their front doors at first light. The subjects in question were all found guilty of varying types of fraud.

But clearly the show wasn’t designed for sympathy. Apart from being very interesting, and showing far more glamorous jobs than mine ever was, it was a cleverly put together piece of TV designed to let the viewers know exactly how far HMRC will go to pursue tax dodgers, and the amount of raw information that is now available to the department. Was it all for show and propaganda I hear you ask, well let’s talk about that.

A few years ago I was asked to give a tax talk, with a subject of my choosing, to a group of local business people. We had speakers from various sectors and I was the nominated tax guy. Nearer to the event I realised I’d been allocated one of the graveyard slots, just before lunch and following a pension presentation given by a lovely chap I’d worked with before, but with an unenthusiastic monotone that could make the most exciting subject sound as dull as ditch-water. On the morning of the presentation, and watching the audience slowly nodding off over complicated explanations about pension input periods, I decided to ditch my pre-planned talk about recent budget changes. Instead I decided to go for a more audience participation approach and become something of a holiday camp blue-coat. My new subject was going to be about HMRC, what does it know about you?

I began the presentation by spending half an hour asking for shows of hands to find out who knew what information HMRC might have on them. It was clearly an eye opener on both sides. Most people understood the basic concept that HMRC will know about your jobs and any benefits in kind, after all, employment income and benefits in kind are subject to reporting requirements. Most people also understood that HMRC have access to bank interest details and are able to obtain information in the public domain, for example Companies House, planning applications made to the local authority, HP checks and even links to DVLA. Obviously HMRC doesn’t have the resource to check every taxpayers affairs in this level of detail, but if you are unfortunate enough to be a subject of interest then the intelligence officers have a raft of information on which to build a potential enquiry case.

But then we moved into the more obscure areas of information such as property, land transactions, and in particular HMRC’s super-information system which links taxpayers to a multitude of information sources including everything I’ve already mentioned, along with bank account details, and even passport control. I told the story of a client I’d represented a few years before who had been less than truthful in recording his cash jobs and we were now having a meeting with HMRC to settle. The meeting was a technicality. As we got to the stage of signing forms and discussing a short payment arrangement, the client started talking unnecessarily about all sorts of stuff in his personal life. He was a nice guy but loved the sound of his own voice and could talk for England. Prior to the meeting I had told him to curb the chat and just concentrate on what needed to be done, but here he was warbling on about his wife’s favourite TV shows, his son’s favourite football team, and how he needed a holiday to get over the enquiry as he hadn’t been on holiday in years. The Inspector looked up with a dry smile, “Oh really, I thought you went to Las Vegas last year?” I smiled inwardly as the client went the colour of cat sick. Thankfully it didn’t affect the settlement.

I looked around the audience and noticed a small handful of people had lost a bit of colour in their faces too. They had seemed particularly absorbed in my comments about property and land transactions. I had explained that over the years, a vast amount of money had been spent developing a system that gave HMRC full information about each and every property and land transaction over many years. I had told everyone that I was looking after a number of clients who had received letters from HMRC suggesting their returns were incorrect with regard to property and land, or in some cases being more direct as to the information that was held. I pointed out that the ramifications of this information could be quite catastrophic for people who had bought and sold properties and never returned the gains. More common though were people who had acquired additional properties for rents and never got round to telling HMRC about the rental income.

Predictably I had a small queue of people looking to see me during lunch and after the event. All of them were concerned with the rental income angle and hadn’t realised the scope of HMRC’s radar. There also seemed to be a common misconception that HMRC couldn’t look back into earlier years because they should have written out much earlier. I pointed out that if tax returns were wrong then HMRC can assess someone to tax in the previous 4 years without breaking a sweat, and 6 years if the omission was deemed to be careless. An omitted source of income would generally be treated as deliberate by HMRC which means that, technically the full 20 years could come into play. Several people arranged to see me over the next few weeks to talk about their rental income issues and, over the course of the following months, all cases were disclosed and resolved without enquiry from HMRC and with minimal pain to the client.

If there is a punchline to this article, it is to speak to an accountant if you think your tax affairs aren’t necessarily correct, or if you know that something has been missed off a return. Burying your head and hoping for the best isn’t the best approach and has no guarantee of success. Disclosing errors to HMRC before you find them will result in a drastic mitigation in penalties and possibly a return to sleep filled nights. Any decent accountant will have a chat with you without charging for providing a general overview. If in doubt you can always contact me at neill.staff@raffingers.co.uk.

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