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How common are civil tax investigations?

27 October, 2020

We are often asked how common civil tax investigations are.

The accurate figures are difficult to quantify, but some have been released because of Freedom of Information requests in the past.

These usually relate to the number of cases that reach the Code of Practice stage.

Code of Practice 9 (COP 9)

In 2016/17, 549 COP 9 cases were opened, and 340 were closed yielding £161,101,906 in reclaimed revenues. 

In 2017/18, 486 cases were opened, 375 were closed, and £91,132,189 was reclaimed in revenues.

In 2018/19, 438 cases were opened, 512 cases were closed, and £95,829,887 was reclaimed in revenues.

Code of Practice (COP 8)

In 2016/17, 297 COP 8 cases were opened, 218 were closed, and £70,063,729 was reclaimed in revenues.

In 2017/18, 369 cases were opened, 249 were closed, and £73,691,388 was reclaimed in revenues.

In 2018/19, 258 cases were opened, 380 were closed, and £118,473,289 was reclaimed in revenues.

These numbers may seem relatively small.

What is important to remember, however, is that most cases don’t reach COP 9 or COP 8 stage. Most are resolved before an investigation reaches this stage.

The fact that these investigations are resolved does not mean that the investigations are stress-free, and not fraught with greater risks.

Costly and time-consuming

Being faced with an intrusion by HMRC, whether as a check or a formal investigation, is a daunting prospect.

It is usually time-consuming and can prove costly.

They last 16 months on average, and cost up to £100,000 in professional fees.

They represent a ‘no-win’ scenario for the individual because even if you have committed no wrongdoing, you are responsible for managing your side of the investigation.

If you fail to do so properly, that in itself can lead to further proceedings.

Reducing the threat

Unfortunately, it is not possible to entirely eliminate the threat of an HMRC investigation.

Every year, HMRC conducts a number of investigations at random.

There is no data available on how many of these checks are conducted, how much revenue they yield or how many uncover fraud What is clear is that every company in the UK  is potentially at risk from investigations each year. These investigations disrupt the day-to-day business of the company and potentially pose further issues such as reputational and financial damage.

Despite it being impossible to eliminate  the possibility that you will be investigated, there are steps you can take to reduce your risks.

HMRC is deliberately cagey about its criteria for opening an investigation. In practice, however, there are various red flags that appear to act as triggers.

Tip-offs

HMRC regularly receives tip-offs from former employees, customers, neighbours, even family and friends about an individual, or company’s tax practices.

It takes such information seriously, and it can often be the catalyst for an investigation. The most common reasons for a tip-off are:

  • Disgruntled employees or an ex-partner who is aware of fraudulent tax practices
  • A cash-only policy at a business can prompt customers to inform HMRC
  • An individual who appears to enjoy a lifestyle that is beyond their declared means

Mistakes

A one-off mistake on your tax return is unlikely to prompt an HMRC investigation, but it may be flagged up.

If future returns contain similar mistakes, then HMRC may start to grow suspicious.

Any patterns that are spotted will prompt investigators to ask if these are genuine mistakes or fraudulent.

Numbers fluctuate by large margins

Large fluctuations in your figure’s year-on-year can prompt an investigation.

Whether this is a radically reduced income, or a rapid rise in outgoings, either can prompt interest from HMRC investigators.

There can be any number of reasons why a business may have reduced profits,  such as reduced opening hours, or relocation. 

You can reduce the chances of an investigation commencing by letting HMRC  know the reasons for the fluctuations in advance.

Years without profit

If you have  been in business for several years but have not turned a profit, HMRC may be keen to explore why.

If you have made a large initial investment that you are carrying over, then it’s quite possible that it may take years before a business begins to show a profit.

If, however, you’re filing a tax return that states you do not owe Any tax, it is highly  unlikely that HMRC will leave this unchallenged for long.

As with fluctuations in the figures, the best way to avoid a HMRC investigation is to provide them with more information in advance.

Industry norms

If your business is earning much more, or less, than would be likely for your industry, then it can spark suspicion.

It’s important to categorise your business correctly.

For instance, a landscaping company is likely to earn substantially more than a jobbing gardener, so if you operate the former, describing your business as ‘garden services’ may cause confusion.

Directors earn less than employees

A red light for tax inspectors is when senior management appears to be earning less than more junior employees.

The suspicion is that directors may be taking advantage of tax-avoidance schemes.

The simple way to avoid this possibility is to maintain a professional hierarchy in salaries, and to keep the paying of salaries straightforward and transparent.

Professional advice

The exact figures regarding civil investigations may be opaque, but HMRC employs teams of investigators whose job it is to go through tax-returns with a fine-tooth comb.

If you receive notification of an investigation, it is imperative that you seek professional advice as quickly as possible.

You can discuss your case with one of our expert lawyers on a no-obligation basis.

Contact us to find out how our professional, experienced, and discreet advice and representation can help you negotiate a HMRC civil investigation.