Recent reports suggest that HM Revenue & Customs (‘HMRC’) have launched 137,000 tax investigations in the six months to December 2021 – reflecting quite clearly how HMRC is increasing its compliance activity at an alarming rate and those with undisclosed tax irregularities, in our view, will be at the foremost of future HMRC interventions.

This brings to the surface questions that are commonly posed by clients and tax advisors alike that circulates along the lines of ‘how will they know?’ or ‘why should I tell them?’

The ‘they’ and ‘them’ being, of course, a direct reference to HMRC. The short answer, as unpopular as it may seem, would be that ‘they’ know and have access to much more than we may realise.

This article explains the resources and information available to HMRC, the relevance of the Hidden Economy team and more importantly what you need to do if you do indeed have undisclosed assets with tax irregularities.

The HMRC Hidden Economy team

The Hidden Economy team is a specialist HMRC units tasked with the sole purpose of identifying individuals, businesses or other entities operating outside of the tax system and, as a consequence of this, are failing to meet their tax obligations. This team is staffed by experienced HMRC investigators with dedicated resources that allow them to identify and target the individuals concerned.

So, what resources are available to HMRC?

HMRC investigators, including those in the Hidden Economy, are supported by HMRC’s Risk Intelligence Service (‘RIS’). This team are specifically trained data handlers who use a sophisticated interrogation system called ‘Connect’ to identify possible errors or omissions in a taxpayer’s affair prior to and during any tax investigation.

The Power of ‘Connect’ should not be understated and some may agree that it is one of HMRC’s most significant assets held in its already draconian armoury.

Unknown to many, the ‘Connect’ system allows HMRC to conduct searches on individuals and businesses to identify information available within and outside the scope of the public domain. This data allows HMRC the opportunity to scrutinise the taxpayer’s tax affairs and identify any areas of concern.

What happens if HMRC identify an error?

HMRC will begin by writing to you informally. They will tell you that they are in receipt of information which suggests that you are operating outside of the tax system. At this stage they will not be specific and give you an opportunity to respond to the letter, provide you a copy of the HMRC factsheets and suggest that they may investigate your tax position further. The HMRC correspondence received at this point is more commonly referred to as ‘nudge letter’ and as the name suggests it acts as prompt to the taxpayers to correct their tax affairs – that is of course if a correction is required.

How can you protect yourself?

If you have undisclosed income or gains either in the UK or overseas, we recommend that a voluntary disclosure to HMRC is the best way of protecting yourself from any HMRC intervention.

HMRC is aware that many taxpayers do wish to correct previous errors. To accommodate this, they have created a range of disclosure facilities. These include:

• Worldwide Disclosure Facility
• Let Property Campaign
• Digital Disclosure Service
• Contractual Disclosure Facility

It is vitally important to use the correct disclosure facility to make HMRC aware of the errors in your tax affairs. Using the right disclosure facility can ensure that you effectively manage and control the scope of HMRC’s investigation, only pay the minimum penalty applicable to your individual circumstances and correct your tax affairs appropriately.

How can we help?

We have extensive experience in assisting clients to deal with HMRC interventions and tax disclosures. Should you or your clients feel you may be at risk of being subject to a HMRC investigation or indeed are currently under investigation, please do get in touch for a free no obligation discussion and a member of the team will be happy to advice you further. Please contact us by email to info@independent-tax.co.uk or by calling us on 01757 630010.