HMRC Tax Investigations - why take the chance?
The risks of a tax investigation
Will HMRC come knocking on your door?
It’s a fact – humans are bad at assessing risk. We’re terrified of things that rarely happen (plane crashes, power station meltdowns) but we're relatively relaxed about things that are statistically more likely to affect us directly.
The likelihood of HMRC swooping to investigate your business’s tax affairs seems to be a particularly difficult risk to quantify and noone really knows why, when or if HMRC will start an investigation into your tax affairs.
Why take the chance?
In 2017, the Government published a report called ‘Understanding evasion by small and mid-sized businesses’. The authors interviewed 45 people known to have engaged in deliberate tax evasion in an attempt to get to the bottom of what made them risk it.
It found that tax evaders cited a range of reasons for withholding tax;
Some judged the risk of detection to be low, and assumed evasion would be hard to prove even when suspected, or thought that any fine they did incur would be outweighed by the financial benefits of bending the rules.
Others were emboldened by a belief that, to paraphrase, “everybody does it, and nobody cares”.
Meanwhile, those who fancied themselves as having the gift of the gab simply assumed they would be able to talk their way out of prosecution.
The report concludes that it is a problem for HMRC if people think the chances of being investigated, prosecuted and fined are low, and recommends raising the perceived threat level to deter would-be evaders.
How likely is an investigation?
There are no concrete figures on how likely it is that a business will be investigated, because the Revenue guards this information closely.
For quite understandable reasons, it doesn’t want people to know exactly how likely an investigation is, or what the triggers might be. The fact is, as with most law enforcement, its work depends on the fear of being caught as much as on actual prosecutions.
There are some statistics that HMRC is willing to share, however, which give a sense of its activity:
- Since 2010, it has secured £185 billion in extra tax through investigation and prosecution.
- It is successful in more than 90% of criminal cases it brings to trial, and in 2018 secured more than 830 criminal convictions for tax and duty fraud – more than 80% of those charged.
- Since 2010, HMRC investigations have resulted in more than 5,000 individuals being criminally convicted.
In recent years, compliance with IR35 legislation has been a particular focus for the Revenue, as the Government has sought to crack down on what it perceives as ‘disguised employment’ among contractors and freelancers.
If you find yourself or business under investigation by HMRC, please contact our tax team for advice on 01223 810 100