HMRC spend on tax investigations brings in even higher returns

New data shows that HMRC’s tax take has been bolstered by more successful investigations into individuals and SMEs. The investigation units that focus on those small businesses and individuals collected £16 extra in taxes for every £1 spent on their investigatory staff in 2016/17, up on the £15 collected the year before.

To put this into perspective, investors in the stock market over the last 30 years have seen an annual return of 7.2%. HMRC’s investment into tax investigations is returning a remarkable 1500%. The high returns that HMRC gets from these investigations mean that it would be no surprise to see even more money channelled into these investigations to increase HMRC’s take further.

The dedicated team investigating individuals and SMEs examine a broad range of taxes including VAT, Income Tax and National Insurance contributions.

In the hunt for even greater returns for the Government, there are a number of ways that HMRC may choose to spend any extra funding. HMRC may, for instance, look to increase the size of its investigation teams at these directorates as well as possibly investigating a much broader base of tax arrangements and schemes.

The Treasury has already pledged an extra £1.8 billion to HMRC in the lead up to 2020 to collect even more additional tax and increase the number of tax investigations. In return for this additional amount from the Government, HMRC has committed to collecting nearly £1 billion of additional tax revenue annually by 2020-21.

HMRC has been known to see individuals and small businesses as a soft target, as they often do not have the same resources as large businesses, and cannot negotiate with tax inspectors in order to close down or limit tax investigations.

With HMRC looking to increase the number of investigations, both individuals and businesses need to be more careful than ever about their tax practices and review their current arrangements.

You can protect yourself against the cost of straightforward tax investigations by subscribing to our Tax Investigation Service. The insurance cover we offer, in common with most in the market, limits your cover to £5,000 in the case of HMRC enquiries opened under HMRC Code 8.

HMRC uses Code of Practice 8 (COP8) where it believes that a large amount of tax has been underpaid, as a result of complex tax arrangements or tax avoidance schemes which have been implemented by a large number of taxpayers.

These investigations generally do not involve an allegation of suspected serious fraud at the outset. Nonetheless investigations under COP8 should be treated seriously since it is possible that if evidence of fraud is revealed by the investigation, COP9 may be issued or a criminal investigation started.

COP8 investigations often focus on the gathering of large amounts of information so it is vital to understand the limitations of HMRC’s powers and which documents have the protection of privilege. There is no standardised format to a COP8 investigation, unlike COP9 which is used where HMRC suspect fraudulent activity. In that case no fee protection cover is provided. We seek to establish at the outset of an enquiry, often opened by the emotive sounding F.I.S department (formerly the Fraud Investigation Service) whether HMRC suspects fraud or whether the department is simply handling a normal enquiry or one commenced under COP8. In this way we can advise our clients of the extent of the Fee Protection Insurance available to them under their policy. Further detailed information relating to insurance coverage written in straightforward terms is available on request.