Given the state of the economy, individuals and businesses alike are looking for new ways to generate income and make the most of what they have. While starting a side business or looking for new ways to make money is a sensible move, it's not a wise idea to keep information on new revenue streams from His Majesty's Revenue and Customs (HMRC). Fundamentally, it is illegal and is tax evasion; those that are caught by HMRC run the risk of having to pay additional and substantial costs in the form of interest and penalties on top of the tax they should have paid in the first place.
In cases that are particularly severe, the evader could go to prison. Crucially, because of the large amount of data that HMRC stores and can access from third parties, there is a high likelihood of catching tax evaders.
Missing tax
The difference between what HMRC believes it ought to collect in tax and what it actually manages to collect is estimated each year. Known as the ‘tax gap’, the estimate for 2020–21 put this amount at £32 billion (HMRC, 2022a).
The disparity is caused by a wide range of factors, including errors, fraud as well as differences in perceptions of the law between HMRC and taxpayers. Within that range, it is anticipated that ‘ghosts’, or those who are completely outside the tax system, are responsible for an estimated £1.1 billion in tax losses. ‘Moonlighters’, or those who haven't disclosed every source of income, are estimated to be responsible for an additional £900 million in losses. Trying to catch up with these dishonest taxpayers is one of HMRC's key responsibilities.
HMRC undertakes numerous compliance activities. It conducted 265 000 investigations between 2021 and 2022, and its tax compliance activities resulted in an additional £30.8 billion in tax revenue (HMRC, 2022b; National Audit Office, 2022). These numbers were lower than usual because of the Covid-19 pandemic, which limited HMRC's ability to complete as much compliance work as it wanted to as its employees moved to other positions. However, staff are back to their usual roles.
When a tax return is submitted, HMRC typically has 12 months to conduct a compliance check into the return. Such checks are both targeted based on information HMRC has gathered about individuals and businesses but can also be random; indeed, every taxpayer is at risk of a random inquiry.
The chancellor, Jeremy Hunt, reiterated the government's desire to combat fraud and error in his Autumn Statement last November (2022), promising a five-year plan that collects an additional £1.7 billion that is missing through tax avoidance (evasion) and other forms of noncompliance (HM Treasury, 2022).
What HMRC knows
Although many people are aware that HMRC can investigate their tax affairs, the likelihood of being the subject to a random investigation is thought to be low due to the fact that only a small percentage of returns are examined completely at random. However, HMRC has access to a vast amount of information, enabling it to conduct numerous more targeted inquiries when a taxpayer's tax return does not match the information it holds.
Third parties, such as banks and building societies, financial institutions, letting agents, and online cryptoasset exchanges, as well as other government agencies such as HM Land Registry, Companies House, and DWP, either automatically send information to HMRC or are sent requests for it. HMRC is also able to request information about sales or earnings from well-known online marketplaces such as Etsy, AirBnB, and eBay regarding potential trading, shares, cryptoassets, and property rentals and sales.
HMRC automatically receives information on savings income from banks and building societies held by UK residents in overseas accounts as a result of information exchange agreements with other nations. This helps it identify undeclared overseas wealth.
Finally, HMRC also receives information directly from whistle-blowers, such as disgruntled employees, ex-spouses or partners, unhappy business partners and jealous neighbours.
But HMRC's compliance strategy is based on more than just data. In order to counter areas of tax-loss risk, all of that data needs to be processed. HMRC has since 2010 had access to powerful CONNECT data analysis software. Matching information from multiple sources to taxpayers and identifying patterns or anomalies that require investigation is made easier by CONNECT.
Nudge letters
The way that information from CONNECT is used means that HMRC often now begins an inquiry into a group of people or businesses that have been identified as potentially under-declaring tax with a standard letter. These ‘one-to-many’ letters suggest to taxpayers that they must examine their tax affairs and take the necessary steps to correct their position.
Using data from Companies House records, HMRC has been able to identify changes in the ‘person of significant control’ (PSC) for a number of companies. (PSCs are, broadly, individuals who own at least 25% of the company's share capital.) Where Companies House records for 2020/21 showed someone had ceased to be a PSC but there was no evidence of a share disposal on their tax return, HMRC wrote to ask if they had disposed of shares and needed to report any capital gains tax.
Any landlord offering residential letting and who requests a deposit from a tenant has, since 2007, been required by law to deposit this amount with one of three Tenancy Deposit schemes. HMRC was able to identify individuals who had placed deposits from a new tenant into a scheme. It then looked for taxpayers whose tax returns appeared to have either no rental income or insufficient rental income.
Additionally, by utilising data from cryptoasset exchanges, HMRC was able to identify approximately 8000 individuals who were buying cryptoassets but had not reported any transactions on their tax return.
Of course, not everyone who receives a one-to-many letter has under-declared tax; instead, there may be other factors, such as available exemptions or expenses that mean that there is no tax to pay. However, individuals in receipt of such a letter should not disregard them as, normally, income and expenses must be officially claimed on a tax return.
» HMRC has access to a vast amount of information, enabling it to conduct numerous more targeted inquiries when a taxpayer's tax return does not match the information it holds «
Because HMRC will typically want taxpayers to confirm that they believe their tax position is correct, it is essential that received letters are read carefully to determine what action is required; if necessary, appropriate professional advice on how to respond should be sought. HMRC may proceed to a formal inquiry if no action is taken or the given response is not accepted.
Setting the record straight
Taxpayers aware of undeclared income should seek professional advice and contact HMRC as soon as possible to declare and pay the tax. Any penalties levied are calculated as a percentage of the tax that was not paid; the percentage could be anything from 0% to 100%, to more than 100% for offshore income or gains. Taxpayers that cooperate and come forward voluntarily to HMRC should see penalties reduced. In essence, during an investigation taxpayers are scored based on how much they ‘tell, help, and give’ to HMRC. Therefore, those that are uncooperative and have attempted to conceal their income will face the highest of penalties.
Deciding how best to tell HMRC about under-declared tax is a very complex area, and in most cases—especially if the decision to under-report was deliberate—it would be sensible to take appropriate professional advice about which disclosure facility to use; what, if any, expenses or allowances may be available and how far back it will be necessary to go.
In simple terms, returns for tax years (or periods of account for businesses) ending no more than four years ago will generally need to be corrected where income has been under-declared due to an innocent error. If the understatement was careless, this time frame can be extended to six years. And if the understatement was deliberate, it can be extended to 20 years.
It is important to check that undisclosed income doesn't have a wider impact. There may also be tax consequences over more than one tax—for example, a business which has not declared all of their sales will not only have paid insufficient income tax or corporation tax, but they could also have under-declared VAT—or missed that they should have registered for VAT.
» Once a taxpayer knows or suspects that they have under-declared tax, they should act quickly to correct their position. In the long run, this will be the most cost-effective and least stressful approach. With so much data on individuals and businesses, it is only a matter of time before it finds missing tax «
» Deciding how best to tell HMRC about under-declared tax is a very complex area, and in most cases—especially if the decision to under-report was deliberate—it would be sensible to take appropriate professional advice about which disclosure facility to use; what, if any, expenses or allowances may be available and how far back it will be necessary to go «
Concluding note on tax
Once a taxpayer knows or suspects that they have under-declared tax, they should act quickly to correct their position. In the long run, this will be the most cost-effective and least stressful approach. With so much data on individuals and businesses, it is only a matter of time before it finds missing tax.
Panel: health professional caught for tax fraud
According to a 2015 issue of the BMJ, a GP was sentenced to 18 months in prison after admitting to defrauding HMRC of £185 000. He was struck off by the Medical Practitioners Tribunal Service (Dyer, 2015).
The tribunal panel concluded that Michael Summer's actions had ‘damaged the reputation of the medical profession and degraded the public's trust in it’.
Summer had previously worked as a locum GP but began earning more after 2009 when he set up as a GP in private practice, carrying out medical examinations in personal injury cases and for the armed forces. From 2008 to 2012 he increasingly under-declared his income.
Further, according to the latest list of tax defaulters that HMRC publishes quarterly, two dentists were caught (HMRC, 2023). Ahmad Thamer Abbas Al-Shammary was found to owe just under £65 000 and was charged a penalty of close to £35 000. The period of tax loss covered April 2012 to April 2016.
Similarly, Arjang Hedayaty Khams evaded tax of £35 600 between April 2013 and April 2018 and was charged a penalty of just over £20 000.
And on the same list was Tiryaq Services Ltd that supplied medical staff. It evaded tax of nearly £113 500 between April 2015 and March 2017 and faced a penalty of close to £41 600.