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April 2019 Tax Investigation Round Up

April's round up of the latest tax investigation news and cases:

  • Software applications being used by businesses for Making Tax Digital allow HMRC to access greater amounts of data on individual's finances and more.
  • HMRC has confirmed that 5.67 million tax records for individuals with offshore financial interests have been provided as a result of the Common Reporting Standard.
  • More than 1,400 production orders were issued by HMRC over the past 12 months to professional service firms in relation to tax evasion investigations.
  • First-tier tribunal between a married couple and HMRC goes in favour of the taxpayers who claim that the information requests they received from HMRC were a "fishing expedition".

Making Tax Digital software allow HMRC to access increasing amounts of data

Recent changes have resulted in HMRC having greater access to a wider source of financial data than they have previously enjoyed. With the assistance of their super-computer that pulls large amounts of financial data together from different places, HMRC are monitoring how people interact with its own services.

The introduction of Making Tax Digital means that an increasing amount of information is available to them digitally. Even when an individual is not logged into or using HMRC's online services, the authorities can still access data through the accounts of tax advisers working on their behalf.

HMRC are collecting data about a variety of things such as which devices people are using, the internet connections they use, what services people use and what information they provide HMRC. The privacy policy available on HMRC's website explains that the purpose of the data collection, which is stored for 6 years plus the current year, is primarily for security and anti-fraud purposes.

HMRC's crackdown on offshore financial interests generates 5.67 million records

The Common Reporting Standard was introduced to support HMRC in clamping down on tax avoidance and tax evasion by individuals with financial interests overseas. They have now confirmed that in 2018 reports for more than 3 million individuals with offshore assets were provided. This resulted in more than 5 and a half million individual records being provided to HMRC from as many as 100 jurisdictions.

As of yet it is unclear how much tax has been recouped as a result of the huge amount of data they have received, with a HMRC spokesperson stating "We are unable to provide a figure on the amount of tax secured as a result of the Common Reporting Standard as this data is not in the public domain".

Individuals who wish to make voluntary disclosures in relation to potential offshore assets can do so via the Worldwide Disclosure Facility and have been able to do so since September 2016. Where voluntary tax disclosures are not made via the WDF, HMRC are likely to investigate where they believe there is tax to be recovered. A significant benefit of the WDF is that it allows individuals to settle their tax affairs with HMRC more cheaply than the alternative.

1,414 production orders were issued by HMRC to professional service firms

Between March 2017 and March 2018 more than 1,400 orders were issued by the Criminal Investigation Directorate, part of HMRC, to a range of professional service firms including accountants, lawyers and other financial advisers. The requests relate to tax investigations and ask the third parties to provider information about their clients that could potentially be incriminating.

Whilst this is a similar figure to the previous year which saw around 100 more orders issued, a City of London law firm suggests that HMRC are investigating an increasing number of criminal cases where individuals are believed to have participated in arrangements with the goal of reducing their tax bill. This includes schemes such as film financing investments which were used by a number of high-profile individuals.

Some accountancy and tax firms find HMRC's approach to opening criminal investigations in cases of this nature concerning. At a partner at one leading law firm said that the commencement of a criminal investigation can have "serious practical difficulties for businesses, and the length of these investigations can cause a great deal of stress", even where no wrong-doing is found.

First-Tier Tribunal held that HMRC issued invalid information notices against married couple

Mr and Mrs Hegarty were contacted by HMRC back in March 2016 in relation to property they had transferred to their son and relief they had claimed, informing them that a tax investigation was being opened under Code of Practice 9 for suspected tax fraud.

Following an initial meeting during which HMRC requested information and documents pertaining to the taxpayer's CGT returns, HMRC issued an information notice as the taxpayers had refused to provide the information. This first information request was appealed, and the appeal was allowed. HMRC then issued a second, almost identical information notice which was also appealed.

Once again, the appeals were allowed, and the notices were set aside. Ultimately HMRC was unable to provide enough evidence to show reason for suspecting there had been an under-assessment and therefore could not validate the notices. The taxpayers argued that HMRC were using information notices as a "fishing expedition" and urge individuals to think twice before responding to information notices they may receive from HMRC.

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