LATEST NEWS: HMRC writes to UK residents named in leaked Pandora Papers giving them chance to correct their tax affairs. Read more...
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November 2021 Tax Investigation Round Up

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

  • A large volume of fraud enquiries expected across Wales
  • HMRC nudge letters sent to cryptocurrency investors
  • The top UK tax avoidance hotspots are revealed

A large volume of fraud enquiries expected across Wales

HMRC have worked tirelessly to recruit over 1,200 investigators since March to get their Taxpayer Protection Task Force up to strength. Now the department is up to capacity it is apparent that they are able to conduct around 30,000 checks as it starts to focus on stricter enforcement. According to business advisers Grant Thornton, the government's aim is to recoup a suspected £7bn of furlough fraud from the Coronavirus Job Retention Scheme.

Based on recent figures, more than one million UK businesses took advantage of using the CJRS during the pandemic. It successfully safeguarded more than 11.6m jobs at a cost of around £70bn. Grant Thornton conducted a survey earlier in the year finding that of 605 businesses surveyed, 16% had not checked their original CJRS claims to check if they were correct.

The government believes that up to 10% of the total claimed by businesses for the CJRS may have been claimed incorrectly, and they believe that fraud has made up a significant proportion of this.

Jonathan Riley, Grant Thornton’s practice leader based in Cardiff explains the letter in which some mid-market businesses may receive this Autumn, “HMRC has been embattled on two fronts: supporting businesses to deal with both Brexit and the pandemic. It’s fair to say the department’s put that ahead of enforcement activity due to a lack of resources. But that stance is set to change as it comes under pressure to recoup a suspected £7bn fraudulently, or erroneously, claimed under the CJRS.

“Come September, we’re expecting that a number of businesses in Wales will be opening a letter inviting them to enter a Contractual Disclosure Facility (CDF) under Code of Practice 9. This lets the recipient know they’re suspected of deliberate fraud and offers them protection from criminal prosecution; on the proviso they come completely clean, disclose any tax errors over the last two decades, and repay the amount owed.”

When a COP9 offer is accepted, the individual will be required to provide HMRC with full disclosure, admitting to any deliberate offences, and why and how they were committed. Every accuracy from the last 20 years will also need to be detailed. Importantly, they will have to concede that any fraudulent claim was deliberate. If the incorrect claim is put down to a genuine mistake, the COP9 protection will be invalidated and the individual will be open to criminal prosecution.

He added: “There’s a misconception that HMRC isn’t interested in smaller and mid-sized businesses. But we’ve seen instances where CJRS claims for one single employee have been investigated. Businesses may have made honest mistakes during the incredibly challenging trading conditions posed by the pandemic. But HMRC’s view is likely to be that there will have been at least three instances to get things right: the initial claim, replying to the nudge reminder letters it has sent out, and again when completing a corporate tax return.

“Receiving a COP9 letter can be a stressful event. It’s important to enlist the right professional advice and respond within the 60-day deadline.”

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HMRC nudge letters sent to cryptocurrency investors

HMRC have planned to send out nudge letters to cryptocurrency investors to help to remind them to pay the correct tax. The tax required to pay is the correct amount of income tax and capital gains tax on any income they have received from crypto asset holdings.

HMRC has the power to obtain a full list of cryptocurrency holders by sending out data requests to UK based cryptocurrency exchanges and any other financial organisations. The tax authorities are wanting to help people to get their tax affairs right and help to educate any taxpayers that may need help.

An HMRC spokesperson stated: "Our letter asks crypto asset holders to review their transactions to ensure that they are declared correctly. We have published detailed guidance to help our customers apply tax law to crypto assets correctly.

"The crypto assets manual explains the tax consequences of different types of transactions involving crypto assets and this can be found on the government website."

Zoe Fatchen, tax partner at law firm Gowling WLG declares: "This is a timely and appropriate reminder of the need to navigate crypto-investment carefully, in line with applicable law and the guidance issued by HMRC, which goes some way to make up for the lack of specific tax legislation and case law in this area.

"Indeed, many individual investors may be unaware that gains made as a result of disposals of cryptocurrency are usually subject to capital gains tax, or that the tax implications in some cases may be more complex than that. Investors should seek tax advice in relation to their cryptocurrency holdings and ensure that any relevant tax is paid, whether or not they receive a letter of this type."

Graham Boar, tax partner at UHY Hacker Young said: "HMRC suspects that there is an increasing amount of hidden wealth thanks to the rise of cryptocurrencies. Many retail investors in cryptocurrencies are under the misunderstanding that HMRC is unable to find out about their crypto investments and any gains they may have made."

Boar encourages investors to declare their cryptocurrency income as any that are found to have misreported could be at risk of tax investigation and subsequent prosecution.

The top UK tax avoidance hotspots are revealed

According to data analysis by UHY Hacker Young, the national accountancy firm, London commuter towns make up all the top five hotspots for tax avoidance in the UK from buy to let landlords. Data also reports that they make up eight of the top ten nationally.

Ilford was shown to have the  highest number of landlords per capita in the country, admitting that they have underpaid the tax on their property income in the last year (14.3 landlords admitting the underpayment of tax per 100,000 people). Closely in second place was Slough, with 12.6 landlords admitting they had underpaid tax per 100,000, followed by Dartford (12.1), Luton (11.6) and Enfield (11.3).

These admissions of tax avoidance by buy-to-let landlords were made under HMRC’s Let Property Campaign. The campaign proactively sends prompts to buy-to-let landlords suspected of avoiding tax on their rental income warning them of the consequences of their actions from avoiding tax.

The campaign has seen a huge success by prompting millions of buy-to-let landlords to come forward and admit to unpaid tax. This admission was seen to help to avoid a full blown tax investigation. In the last year HMRC collected £17.7 million through the campaign.

HMRC’s Connect AI system detects targets for the Let Property Campaign by automatically cross-referencing data from such sources as Council Tax bills, the Land Registry and surprisingly even Rightmove and Zoopla listings.

Buy-to-Let is seen as a great investment for individuals, with now almost 2.7 million private landlords in the UK. Many buy-to-let landlords are not professional investors however, and may fail to seek professional advice from accountancy which may lead to mistakes in tax returns.

Partner at UHY Hacker Young, Neela Chauhan, says: “HMRC sees rich pickings in the buy-to-let market in terms of unpaid tax. The amounts collected from landlords who have voluntarily come forward suggest they may be right in their assessment. Landlords leave themselves vulnerable to prosecution and even a prison sentence if they fail to declare the correct amount of rental income or pay CGT on the sale of buy-to-let properties. Given the consequences of laying low, proactively admitting a possible error to HMRC is unquestionably the prudent course of action.”

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