Tax investigations: snitches and supercomputers

  1. Sign outside HMRC
    Phil Mcelhinney/iStock
    James Martini

    James Martini Contributor

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    HMRC hit the headlines earlier this month after dangling tax-free carrots worth up to £250,000 in front of people willing to turn their tax-dodging former business partners or spouses into the authorities. 

    The Revenue admitted those whistleblowers only get their cash incentive if the information they disclose is “exceptionally helpful” to an investigation, and that the average handout amounts to less than £5,000. 

    HMRC’s reliance on confidential informants is nothing new. It has relied on bitter spouses, ex-employees, or former business partners spilling the beans to open scores of tax investigations over the course of many years.

    With such incentives out there motivating people with an axe to grind to try and line their pockets with a windfall from the taxman, you have to wonder why some business owners take the risk of evading tax in the first place.

    In 2017, the Government interviewed 45 known tax evaders from small and medium-sized businesses in a bid to find out exactly why they ran the gauntlet. Some believed the risk of detection to be low, and thought tax evasion would be hard to prove. Others said that any rewards would negate the risk of being caught.

    On both counts, they were wrong.

    What sparks a tax investigation?

    The Revenue makes no secret that receiving a tip-off is just one way a tax inspector could come knocking at your door. Understandably, HMRC keeps other triggers on its big list a closely guarded secret.

    Alarm bells would almost certainly start ringing if your business’s profits substantially vary year-on-year or if you consistently pay little or no tax. Similarly, you could raise suspicions if you manage the accounts of your profitable business yourself when you could (and should) be working with an accountant. 

    Working in what HMRC considers to be a high-risk industry, one where a culture of cash payments is rife, is another red flag, while filing consistently late tax returns or simply having a business that operates in a specific sector the Revenue is targeting are other generally acknowledged triggers. 

    How much could a tax investigation cost your business?

    Since 2010, the Revenue has pocketed £185 billion in extra tax through its investigations and subsequent prosecutions. Its strike rate of bringing criminal cases to court stands at a whopping 90% - and 80% of those have resulted in tax dodgers being charged. 

    Obviously, every case varies but not only can penalties for failing to pay tax on time hit you in the pocket, but you might also bear the financial brunt of a lengthy probe into your business’s financial affairs, even if HMRC fails to prove any wrongdoing. 

    In some cases investigations can rumble on for more than a year, costing thousands of pounds, although tax insurance packages are out there to soften the blow of any prolonged investigation. 

    HMRC’s all-seeing eye

    The Revenue has been using a powerful supercomputer programme called Connect for the last nine years, and that goes a long way to explaining HMRC’s strike rate when it comes to getting cases heard in court and securing convictions. 

    Connect collates and cross-references unimaginable volumes of data on taxpayers in the UK, from tip-offs and missed deadlines to using information from online auction websites and government agencies such as the DVLA.

    Despite the Revenue keeping Connect’s sources close to its chest, we do know it ploughs through disparate, unrelated information to join the dots and detect networks that may not have been on the Revenue’s radar. 

    Connect uncovered an escort agency turning over more than £100,000 a year at a property in London. The property was worth millions, yet the owner - who admitted trading there for six years - had no record of paying tax. 

    With HMRC deploying state-of-the-art technology to unravel covert cases of tax evasion, is it really a chance worth taking in 2019?