Why do HMRC open tax investigations
HMRC produce an annual document called the "Tax Gap". The tax gap is the difference between the amount of tax that should, in theory, be paid
to HMRC, and what is actually paid. In the 2018-2019 tax year, HMRC estimated the gap to be £31bn. The gap falls into the following buckets/behaviors.
- £5.5bn Failure to take reasonable care (making a mistake on your tax returns)
- £4.9bn Legal interpretation (having a view of the law that differs to HMRC guidance)
- £4.6bn Evasion (deliberately understating your income/gains)
- £4.5bn Criminal attacks
- £4.1bn Non-payment
- £3.1bn Error
- £2.6bn Hidden economy (entire source of income not declared such as not paying tax on the sale of a property)
- £1.7bn Avoidance (finding legal loopholes to avoid paying tax)
Of these amounts, HMRC consider that 51%, or £15.8bn, is attributable to small businesses and individuals. To this end, HMRC have a large team of staff dedicated to collecting this shortfall and they will pursue taxpayers at all costs, if they do not comply with information requests.
Why have HMRC opened a tax investigation into my affairs
A tax investigation can be selected at random, risk based and/or intelligence led. For example, HMRC might hold third party information they believe does agree with the tax position on your tax returns. HMRC have a range of powers that enable them to verify the declared taxable positions including, but not limited to, forcing third parties to disclose information, sharing of information within government bodies, extensive sharing of information with financial institutions and agreements with governments overseas to share information. In addition to this, HMRC have at their disposal, teams of subject matter experts. Another reason you need a professional advisor. Another common reason for a tax investigation is when you are applying for a tax refund.