HMRC enquiry data

The number of tax compliance checks HMRC opened in 2022/23 increased to 299,000. This represents a 21% increase across the two tax years since 2020/21. More recently, it is clear that HMRC has increased its compliance checks post pandemic. So far in 2023/24, HMRC has opened 237,000 enquiries with one quarter of the year remaining, meaning that they are on course to increase this for the third year in a row.

By Tom Annat – Senior Tax Manager

HMRC’s thirst for data

As technology has improved over the years, HMRC has been able to gather vast amounts of data. In the UK, HMRC uses its ‘Connect’ software which pulls in data to check this against declared income and gains. The software will take data from, among others, Land Registry, Companies House, the DWP, banks, insurance companies, and newspapers. Moreover, since 1^st January 2024, popular trading platforms such as Airbnb, eBay, Etsy and Vinted are required to share information with HMRC about its users.

On a global level, tax authorities have been regularly sharing information for many years under the common reporting standard (CRS).

Crypto-assets and cryptocurrencies

HMRC is continuing to target crypto tax compliance and the expectation is that this will only increase in the coming years. In 2019/20, HMRC started to focus on crypto compliance by requesting that crypto platforms supplied them with details of UK customers who received more than £5,000 in crypto currency payments.

Crypto-Asset Reporting Framework (CARF)

In a further pledge to tackle crypto tax evasion, the UK has committed to joining the Crypto-Asset Reporting Framework (CARF) in 2027. This is an OECD initiative aimed at clamping down on cross-border tax evasion on crypto-asset transactions. Many countries have committed to be included in this framework, including, amongst others, the USA, France, Germany, Australia, Switzerland. This will enable HMRC to automatically receive information relating to crypto trading from overseas tax jurisdictions.

What happens with the data?

HMRC will use all the data it gathers to build up a picture of a taxpayer or a group of taxpayers. HMRC can then compare this to what it knows about the taxpayer and whether tax return filings are consistent with the perceived wealth of the taxpayer. HMRC may then target a particular group of taxpayers with ‘nudge’ letters. The idea being, that a taxpayer is ‘nudged’ to check an area of their tax affairs and perhaps make an amendment to a return or prompt them to make a disclosure.

HMRC powers of investigation

HMRC has a wide range of powers it can use to investigate areas of tax evasion and fraud. If a taxpayer can prove they have taken reasonable care, the assessment time limits are usually up to 4 years. If there is careless behaviour, time limits are extended to six years for domestic issues and up to 12 years for offshore matters. If HMRC has not been notified of a liability, they usually have a 20 year assessment period.

Penalties and interest

Penalties will be due if the error or omission was a result of careless or deliberate behaviour. For UK tax issues, the penalties can be up to 100% of the tax due in severe cases. For offshore activities, the penalties can be up to as much as 300% of the tax due. The minimum penalty for offshore activities is 150% which is reduced to 100% for a voluntary disclosure.

Late payment interest is payable from the date the liability arose until the debt is paid. The late payment interest rate does fluctuate but currently stands at 7.75%.

Making a disclosure

As well as a general disclosure facility, HMRC has facilities for making a disclosure in a particular area, such as crypto-assets, rental income, and offshore matters. It is very important to come forward first because penalties can be significantly reduced compared to when HMRC identifies an issue first.

Next Steps

If you think you may have a tax issue relating to undeclared income or gains, then please do get in touch. We have experienced tax advisors who can help guide you through the process. We have dealt with many disclosures and are quite often able to negotiate lower penalties, particularly where a voluntary disclosure is made.