HMRC tax investigations into individuals and small businesses have increased in the last year from 232,000 in 2021/22 to 248,000 in 2022/23*, according to the Chartered Accountants and Business Advisers, Lubbock Fine.
Lubbock Fine explain that this rise increases the likelihood that taxpayers, that file their self-assessment tax returns late or with mistakes, will be investigated by HMRC.
Penalties imposed for mistakes on tax returns can be up to 30% of the tax owed for careless errors and up to 100% if the error was deliberate in nature. These penalties can be up to 200% if the error relates to an offshore matter.
“With the number of tax investigations accelerating, it’s crucial that taxpayers make sure that their tax returns are correct as the submission deadline approaches,” says Graham Caddock, Tax Director at Lubbock Fine. “HMRC is expected to help the Treasury increase tax revenues and one way of doing that is more tax investigations.”
Lubbock Fine explains that HMRC now has access to sophisticated technology to identify possible areas of under-reported tax on self-assessment returns.
HMRC’s ‘Connect’ system uses artificial intelligence to cross-check 55 billion items of data from a wide range of sources to identify potential cases of tax evasion and avoidance such as data from banks, estate agents and even social media.
HMRC Connect allows the tax authority to quickly analyse information to spot unpaid tax that would previously have required a huge amount of time and human resources. If HMRC detects unexpectedly low levels of bank interest or abnormally low earnings for a self-employed individual, it is more likely to launch an investigation.
“If HMRC investigates and discovers errors in their returns or underpaid tax, taxpayers could face costly penalties or even trigger wider-ranging investigations into their tax affairs,” says Caddock.
As high interest rates increase the amount of interest earned on money kept in savings accounts, many people are being required to complete a self-assessment form for the first time this year.
“Tax returns can be a complex process, especially if people have multiple income streams. It’s vital that people get it right so that they don’t risk penalties further down the line. If their tax affairs are complex in any way the safest option is to seek advice from a qualified tax professional to ensure there are no errors, that would otherwise easily avoidable,” says Caddock.