HMRC estimates that individuals underpaid £7.4 billion in tax last year

HMRC’s latest statistics reveal that it estimates individual taxpayers underpaid £7.4 billion in tax last year, a 10% increase since 2016/17, accounting for 21% of last year’s £35 billion UK Tax Gap.

Consequently, HMRC is targeting individuals with inaccuracies on their tax returns, whether purposeful or accidental, to deter taxpayers from avoiding tax.

The ‘Tax Gap’ is the difference between the amount of tax that should in theory be collected by HMRC and what is actually collected. These estimates can be a good indicator of where HMRC is likely to focus its future investigations, in order to boost its tax take.

HMRC’s approach to eradicating tax avoidance has changed drastically in the last few years; investment in technology, more aggressive use of debt collectors and new, more targeted tactics are just some of the most notable developments.

HMRC’s new technology, Connect, gathers external data, such as trading activity on eBay or Amazon and information on private rental properties, to cross-check with tax returns and ensure that all income is declared. Therefore, inaccuracies are far more easily recognised than before, which has led to the identification of over 500,000 cases for investigation, according to PfP.

HMRC has also discussed its “upstream” strategy, which includes targeted campaigns and “nudge” letters for those with offshore accounts, to prevent non-compliance in the long term.

The targeted campaigns are aimed at specific taxpayer groups or types of taxable activity. For example, the ‘Let Property’ campaign targets individuals with small buy-to-let property portfolios who may not have properly declared rental income. Another example is the ‘Second Incomes’ campaign, aimed at employees with additional freelance income.

HMRC received data on 5.7 million offshore accounts last year, more than treble the information from 2017, as part of a global transparency initiative called the Common Reporting Standard. The information received from this initiative indicates that one in ten taxpayers have an offshore financial interest.

Thousands of ‘nudge’ letters have already been sent to those with offshore accounts, asking them to confirm that the information HMRC has is correct. The objective is to create leads for investigations and to prompt taxpayers to come forward for fear of being subsequently investigated. These letters often do not require a response so it’s important individuals seek advice before taking any action. For example, Accelerated Payment Notices enable HMRC to collect tax it thinks it is owed before an investigation is even concluded.

These investigations have been highly successful so far; HMRC collected an extra £1.64 billion through investigations into individuals last year, a £210 million increase since 2016/17. Clearly, it will be looking to further improve on this in the next 12 months, strengthening its efforts to eliminate non-compliance.

For those targeted by HMRC, investigations can be costly, time-consuming and stressful, especially for those people who may not have the resources to meet legal fees that arise.

Gerald Edelman works with tax specialists, PfP, to provide a Tax Investigation Service, which will help to protect you against a potential HMRC investigation, in the absence of fraudulent conduct.

To find out more, or to subscribe to the service, contact your Partner at Gerald Edelman.