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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 relatively blasé about things that are statistically more likely to harm us, such as unwashed lettuce.

The likelihood of HMRC swooping to investigate your business’s tax affairs seems to be a particularly difficult risk to quantify.

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.

Of course there’s no way to know what percentage of people who evade tax or duty is represented in those figures, but it’s clear that it’s by no means a risk-free way to operate.

IR35 investigations

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.

On this, there are some concrete numbers. In 2009/10, there were only 12 ‘enforcement actions’ as HMRC calls them in this context, yielding £155,000 – but that soon ramped up.

 

 

 

 

 

 

 

 

 

That’s an interesting pattern – more investigations in 2012/13, but producing a lower yield than in 2011/12 – perhaps because the risk of being investigated came to be perceived as higher and so individuals took more care to remain compliant.

After 2014, though, information dries up because, as the Revenue explained in response to a freedom of information request in 2016, “by disclosing numbers of enquiries… HMRC is at risk of inadvertently providing people with the means of identifying coverage rates”.

The cost of an investigation

Quite apart from any penalties for failing to pay tax, and even if an investigation finds that your tax returns are complete and accurate after all, the process can be expensive, time consuming and stressful.

The length of the investigation and the number of individual queries from inspectors is beyond your control, or that of your accountant. It is not uncommon for them to roll on for more than a year, and cost thousands of pounds.

Tax investigation insurance packages are available to help cover the costs of unexpected and prolonged probes, and can help soften the blow.

What triggers investigations?

HMRC doesn’t publish a big list of behaviours it’s looking out for because, obviously, it doesn’t want to give would-be evaders ideas for disguising what they’re up to.

It is generally acknowledged, though, that there are certain red flags.

High variation in turnover or profit from year to year would be one example. Consistently paying little or no tax is another.

If your business is substantial and profitable but you are still managing your own accounts rather than working with an accountant, that can also raise suspicions.

In short, anything that seems out of the ordinary or out of step with the norm for your sector or region – ‘dodgy’ is the most common turn of phrase – will at the very least prompt further scrutiny.

Supercomputers and whistle blowers

When it comes to spotting potential ‘dodginess’, HMRC is better equipped now than ever.

Since 2010 it has used a powerful data analysis system called Connect to pull in and cross-reference vast amounts of information on taxpayers.

It uses data from other government agencies, such as the Driver and Vehicle Licensing Agency (DVLA) as well as online auction and car trading websites, to identify anomalies.

Putting all that data together might, for example, highlight someone reporting minimal profit from a business in a generally profitable sector, while at the same time whizzing about in top-of-the-line sports cars.

On the other hand, many investigations are the result of something distinctly less high-tech: tip-offs from disgruntled neighbours, friends, relatives or employees.

In 2017/18 HMRC’s tax fraud hotline received 40,000 calls, and more than £340,000 was paid out in rewards to informants.

Making Tax Digital

One of the motivations for the rollout of the Making Tax Digital (MTD) programme is to make business accounts more transparent.

MTD will make it compulsory for businesses to keep their accounts using software rather than on paper. The first stage of MTD, covering VAT, kicks in from 1 April 2019, and applies to businesses with a taxable turnover above the VAT-registration threshold of £85,000.

Although there won’t be any requirement for businesses to submit details of every single transaction to HMRC on a real-time basis, they will be obliged to record them, and may be asked to hand over those more detailed records in the event of an investigation.

There will also be an option down the line for businesses to voluntarily submit more detail. Will businesses look as if they have something to hide if they don’t do so? That is certainly a risk.

Going straight

If you’re worried the way you’ve handled your tax affairs in the past hasn’t been quite above board and you want to clear your conscience, the first thing to do is talk to someone.

HMRC advise those who have failed to declare income, or to pay tax on it, to make full disclosure to them at the earliest opportunity.

Depending on the size and complexity of your disclosure, however, talking to us as your accountant could considerably reduce the stress.

We will help you work through the issue and pin down the numbers, and we can counsel you through potentially difficult conversations with HMRC.

Marcus Bishop Associates can help you with your compliance and disclosure.

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A Will is the first step in planning your estate

How to plan and make a legally valid will.
Most people don’t like to think about their own mortality, but planning for the future is important to ensure your property, money and possessions are distributed the way you intend.
Writing a legally valid will is an essential part of this, and can provide peace of mind for you and your loved ones.
Despite this, a study from YouGov found that 62% of the UK’s adult population did not possess a will in 2017. In fact, most people tend to put it off, with only 36% of 45 to 54-year-olds saying they have a will, compared to 67% of over-55s.
When asked why they hadn’t made a will, the main reason was simply that they “hadn’t got round to it yet”.
If you’re among the majority of people in the UK who haven’t drafted a will, this article covers why you need one, how to go about making one, and what could happen if you don’t.

Why do I need a will?
The simple reason for having a will is also the most obvious: to ensure your wishes are fully met after you die.
It’s the only way to guarantee your estate – which is made up of your money, possessions, property and any investments – goes to the people or causes you care most about.
This should provide financial security to your family and their descendants, while wills can also be used to outline guardian arrangements for any children under the age of 18.
While on the topic of family, dying without a will or having an ambiguous will can cause family disputes, so making your wishes clear should mitigate any potential for conflict.
If you’re married or in a civil partnership, having a will is less important as your spouse or civil partner will be your next of kin and beneficiary to at least half of your estate.
However, your partner has no right to inherit your estate without a will if you are unmarried or have not entered into a civil partnership.

How do I make a will?
A good place to start is to value your estate by drawing up a list of your assets and debts. This is something you should review every time your circumstances change.
Assets usually include any property you own, savings, insurance or endowment policies, pensions that may pay out a lump sum on death, and stocks, shares or investment trusts you may have.
It’s also important to take into account any debts, such as mortgages, overdrafts, bank loans and credit cards, when calculating the total value of your estate.
From there, you need to think about how you want your estate to be distributed and to whom. Make it clear who stands to benefit from your estate and if you want to make any charity donations.
Then it’s time to pick the executors of your will – the people, or person, who will distribute your estate to your beneficiaries after you die.
This role should be fulfilled by someone you trust implicitly, although you can appoint up to four executors to manage the administrative work, to check each other and balance judgements.

Tax considerations
When you’re thinking about what you want your beneficiaries to receive, you’ll need to take the tax on your estate into consideration.
Estates above a value of £325,000, or £650,000 for a married couple or civil partnership, could be liable for inheritance tax at 40% on the excess.
An additional threshold of £125,000 (rising to £150,000 in 2019/20) can be used on top of this for passing on a family home to direct descendants, as long as it meets qualifying conditions.
You’re also able to reduce the value of your estate by giving certain gifts, as long as you do this at least seven years before you die.

If there are fewer than seven years between when the gift is made and your passing, inheritance tax is tapered at the following rates:

There are also some types of gift that are exempt from inheritance tax altogether, whenever they are made.
Other complex rules and exemptions apply to inheritance tax, so be sure to talk to us before making gifts as part of your estate planning.

What makes a legally valid will?
If you feel compelled to draft a legally valid will on the back of an envelope, you will need to apply strict criteria for it to be binding.
For instance, you must be an adult of sound mind, and draft your will voluntarily. The will must also be made in writing.
When you sign it, you will need to be in the presence of two adult witnesses, who also need to add their signatures to confirm they witnessed the process.
Another important thing to consider is that your witnesses, or their married partners if they have any, must not be any of the named beneficiaries in your will.
You cannot make a legally valid will under duress or with no witnesses present. The same criteria apply when it comes to reviewing your will.
If you have been diagnosed with dementia or a serious illness, you can still make or update your will as long as you’re present, mentally capable of making a will, and able to direct someone to sign it on your behalf.
Any will signed on your behalf should also contain a clause saying you understood the will’s contents before it was signed.

Can a will be updated?
Yes, and you should always update your will when your circumstances change or, as a rule of thumb, review it every five years.
Changes of circumstance could include the birth of a new child or grandchild, getting married or entering into a civil partnership, or even moving house.
It’s general practice to add to an existing will, rather than conduct a wholesale update, and this is known as a codicil. This also needs to be signed and witnessed.
Alternatively, if you need to make substantial changes, you can draft a completely new will. This new will must contain a revocation clause to prevent the legal effect of any previous wills or codicils.
Marriage, remarriage or entering into a civil partnership cancels any previously existing wills.
Divorce does not cancel an existing will but merely causes any gift to the divorced spouse to no longer be applicable.
Whether this is your intention or not, it’s generally advisable to cancel and rewrite your will in such cases.

Consequences of not having a will
Failure to write a legally valid will before you die will result in your estate becoming subject to intestacy rules, so it may not go to the people or causes you want.
Your estate will then be distributed according to fixed rules and will not take your personal wishes into account. The following scenarios apply if you die without making a legally valid will.

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