HMRC set to commence crackdown in early 2022 – are you at risk of investigation?

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HMRC is expected to start investigations into the UK “staycation boom” in the coming months according to UHY Hacker Young. The national accountancy group warned profits from summer staycation investments are an “easy target for the taxman” and the Government reportedly believes thousands of people are not reporting income from their holiday lets.

What action can HMRC take?

HMRC has the power to request information or documents from third parties such as holiday booking sites “for the purpose of checking the taxpayer’s tax position”. This includes entire databases of popular holiday booking sites.

As coronavirus swept the UK, staycations became increasingly popular out of necessity but as the industry became increasingly lucrative, HMRC took action to crackdown on potential tax issues.

AirBnB, a company that directly benefits from the staycation boom, has already agreed to share information on income earned by its UK hosts as part of a 2020 tax settlement with HM Treasury. As part of the deal, the company agreed to pay an extra £1.8million in tax and share data on hosts’ incomes with HMRC.

UHY warned additional focus could be placed on individuals going forward. Over the next few months, ahead of the January 31 2022 deadline, owners of holiday flats and cottages will be filing their self-assessment tax returns that cover the first year of the Covid-staycation boom. Many, according to UHY, will be tempted to under-report the windfall earnings they have made in that period.

READ MORE: Rishi Sunak may make Inheritance Tax reliefs ‘less generous overall’

Demand skyrockets

As coronavirus placed restrictions on travelling abroad, a “far larger” number of Britons were persuaded to stay in the UK this summer, which in turn led to a boom for UK holiday lets and brought a lot of newcomers into the market. As so many people entered the market, it’s possible rising numbers could be caught out by HMRC’s stringent tax rules and investigations.

Holiday let prices have surged over the last 18 months or so, with increases of 35 percent from last year seen in some tourism hotspots. Summer 2021 was predicted to see a 51 percent rise in domestic tourism spending to £51.4billion, but some sites saw bookings increase by up to 300 percent.

Neela Chauhan, a Partner at UHY Hacker Young, commented: “With the boom in staycations driven by the pandemic, leading to a bumper season for UK holiday lets, it’s likely HMRC will come for their slice of the pie.”

“HMRC will be checking tax returns from people who have let property for a jump in declared income to reflect the staycation boom. Their algorithms will fairly easily identify those holiday homeowners who they think are under-declaring income.

“As HMRC’s Let Property Campaign targeting buy-to-let landlords shows, the Treasury sees landlords as an obvious target for tax investigations and extra tax revenue.

“Landlords are recommended to make sure they are aware of their tax obligations before spending their summer ‘staycation’ windfall. Landlords who fail to declare unpaid taxes are ultimately risking fines and criminal prosecution.”

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Further investigations

Additional research from UHY in July showed HMRC is focused on ramping up its tax investigation efforts. Recent data from HMRC showed it opened 102,000 compliance investigations in Q1 2021, up 36 percent from 75,000 in the previous quarter. This was almost quadruple the low of just 27,000 in the second quarter of 2020.

Additionally, the amount of extra revenue HMRC brought in from its compliance activity jumped 29 percent to £14.2billion in Q1 2021, an increase from £11billion in the same period in 2020.

Graham Boar, a Partner at UHY Hacker Young, commented: “HMRC is turning its focus back to tax investigations. The pandemic has left it with a lot of catching up to do.

“HMRC’s resources have been stretched during the pandemic, while it has also taken a more lenient approach towards taxpayers. That now appears to be ending.

“Taxpayers with skeletons in the closet should be aware that they are at risk of investigations, fines and even prison sentences. It would be favourable for individuals with unpaid tax to approach HMRC first before they come knocking.”

Additionally, in September RPC, the international law firm, found the Government is currently investigating 153 suspected “enablers of tax evasion” cases.

These investigations are focused on “enablers” of tax evasion and more intense reviews could be forthcoming as HMRC’s Fraud Investigation Service has been given additional resources to recruit more staff.

RPC explained: “The definition of enablers is wide and includes wealth managers or technology companies that provide software which could potentially be used to distort profits, enabling businesses to evade tax. Enablers fall under two categories: those who are knowingly complicit in criminal activity and those who may not be aware of their client’s involvement in criminal activity but have failed to carry out proper risk assessment checks.”

Tax gap

It is unsurprising that the Government is clamping down on tax avoidance and evasion as recently released data from HMRC showed the tax gap – which is the difference between the amount of tax that should, in theory, be paid to the Government, and what is actually paid – sat at £35billion.

This equates to 5.3 percent of tax liabilities and total liabilities for the 2019 to 2020 year were £674billion.

HMRC detailed many common tax concerns have had an impact on this, with Income Tax, National Insurance, Capital Gains Tax and VAT making up the largest share with £12.6billion.

While not all missed tax payments are deliberate, Elen Morrissey, a senior pensions and retirement analyst at Hargreaves Lansdown, warned taxpayers could be leaving themselves open to fines if they’re not careful.

“There are many reasons why such gaps exist and while some taxpayers knowingly underpay tax, for many others it comes down to genuine error,” she said.

“While the proportion of business taxpayers with an under-declared liability has fallen, the proportion of non-business taxpayers doing the same has risen from 14 percent in 2005/06 to 22 percent in 2017/18.

“Making a mistake leaves you open to being clobbered with large fines from HMRC as well as having to make good the initial under-declared payment. As many people start filling out self-assessment tax returns in the coming months, they should do all they can to ensure they have a clear idea of their potential liabilities. Make sure you have all relevant paperwork to hand and don’t leave it to the last minute as you might leave something out. Also don’t be scared to call HMRC if there’s something you don’t understand as they will be able to help you. It might even make sense to enlist professional help if needed.”

How to report tax evasion

Where taxpayers believe someone is evading tax, they can report them to HMRC. To do this, people will need to submit their report through HMRC’s website.

HMRC warns however people should not try to find out more about the tax evasion or let anyone know they’re making a report. Examples of what could be reported include:

  • Not telling HMRC about tax they owe (for example on business profits)
  • Keeping business “off the books” by dealing in cash and not giving receipts
  • Hiding money, shares or other assets in an offshore bank account (“offshore tax evasion”)

For those who suspect fraud, they can contact the Insolvency Service, Companies House or the Serious Fraud Office if they suspect a limited company or its directors of serious misconduct.



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