HMRC’s latest statistics reveal that it estimates individual taxpayers underpaid £7.4bn in tax last year, up 10% from £6.7bn in 2016/17. This rise in underpaid tax is likely to prompt a reaction from HMRC as it continues to find new ways to target individuals. The amount HMRC estimates individuals underpaid represents 21% of the total UK Tax Gap last year (£35bn), an increase from 20% in 2016/17 (£33bn).
The Tax Gap is the difference between the amount of tax that should in theory be collected by HMRC and what is actually collected. These estimates can be a good indicator of where HMRC is likely to focus its future investigations in order to boost its tax take. For those targeted by HMRC, investigations can be costly, time consuming and stressful, especially for those people who may not have the resources to meet legal fees that arise.
The rise in underpaid tax comes as HMRC continues to develop new ways to target non-compliance. Over the next year, individuals can expect to come under further scrutiny as HMRC tries to address the gap between what it expected to receive last year and its actual receipts.
As HMRC revealed at our UK Tax Investigations Conference in 2018, it is increasingly moving its compliance strategy “upstream” which means using certain tactics, such as “nudge” letters and targeted campaigns, more often to prevent non-compliance as early as possible.
Many individuals will already have seen this strategy in action. HMRC has mailshotted thousands of people so far this year, asking them about their onshore and offshore tax affairs. These letters often do not require a response so it’s important individuals seek advice before doing so.
HMRC is also likely to start launching more targeted campaigns, aimed at specific taxpayer groups or type of taxable activity. An example is HMRC’s ‘Let Property’ campaign which is targeted at individuals with small buy-to-let property portfolios who may not have properly declared rental income. Another example is the ‘Second Incomes’ campaign, aimed at employees with additional freelance income.
HMRC collected an extra £1.64bn through investigations into individuals last year, up from £1.43bn in 2016/17. It will be looking to further improve on this in the next twelve months.
We have seen how HMRC’s approach to stamping out tax avoidance has changed almost beyond recognition in the last few years. Investment in technology, more aggressive use of debt collectors and new, more targeted tactics are just some of the most notable developments.
PfP are tax specialists and you can protect yourself against the cost of most tax investigations by subscribing to its Tax Investigation Service.