Early Warning for Tax Evaders

Tax, as has often been quoted is one of the only certainties in life; tax evasion and avoidance have been with us since tax has been levied by government on its citizens.  For example the Window Tax of 1695, introduced by William III resulted in architects redesigning houses with fewer windows, householders bricked up existing windows.  This had a negative impact on the glass industry, and some believe that the phrase ‘daylight robbery’ originated from this.

Fast forward to 2013, the topic of non-payment of tax is still topical, albeit the spotlight, as far as the media are concerned is the big corporates who are the non-payers. 

This is not how HMRC see it and one of the purposes of this blog is to overview the current climate, how HMRC find tax evaders and avoiders, the consequences and suggestions as to how to deal with it.  I have used property investors and landlords as an illustration, the points raised are applicable to all groups of taxpayers.
 
Over the last 20 years that I have been involved in tax work and investigations I have seen a change in how HMRC operates; its increasing powers; its wide access to information; and the financial and criminal consequences of non-compliance.  HMRC is increasingly rolling out campaigns against certain groups of taxpayers; these have included doctors, dentist’s plumbers.  Its current   disquiet (amongst many) is second homes, where rental income may not be declared or capital gains tax paid in full when the property is sold. Other targeted groups include the self-employed, who either do not notify HMRC that they are working for themselves or do not declare all their earnings; those who sell items over the internet or at car boot sales, of which a large number are effectively "trading"; businesses and the self-employed who may not be charging VAT correctly, and who may not be registered.

Tax evasion, means doing illegal things to avoid paying taxes, for a property landlord/investor this would include not declaring rental income and/or property gains, abuse of the PPR regime, and  claiming expenses that had not actually been incurred.

The HMRC have a Designated Compliance Unit for property and in March 2013 they are planning to start a campaign using new data to target those who have profited through owning and selling second homes or multiple properties in the UK or abroad and have not paid their tax liability.  Tax inspectors have already targeted buy to let landlords with portfolios of three or more properties in the North West and North Wales.

How will this happen…?
Landlords and property investors need to be aware of the tax office’s (HMRC) increasing focused, intelligence based and assertive approach to tax investigations.  A significant investment in IT, better use of evaluating the immense amount of data accessible by HMRC (such as Land Registry documents, letting agents records, council tax records), additional HMRC staff, significant penalties for ‘non-declarers, wider media exposure and more use of the criminal courts significantly increases the likelihood of being investigated by the big beast that is HMRC.

It is believed that HMRC knows exactly how many owners are trying to sell which investment properties, their primary source of information is now becoming the internet which produces high grade information, not only of houses for sale or to rent but also of planning applications in relation to proposed house conversions which are then sold at a later date producing a potential CGT liability.

How does the tax office know what I am up to?

HMRC has an incredible range and depth of information sources which can be used to uncover tax under-declaration, examples relevant to property landlords include:
• The ‘Northgate Public Services Information System’ database which contains details of housing benefits paid to landlords by any UK local council
• Land Registry documents, Land Registry searches are the main source of information relating to home and land ownership, mortgages, charges, easements, restrictive covenants, property boundaries, rights of way, past ownerships and house prices.
• Electoral Rolls
• Council Tax records
• Mortgage applications
• Letting agent client records
• Information provided by third parties
• So called “schedule 36” information notices, which are legally enforceable notices used to require information (about let properties) to be released by letting agents, insurers, Council Tax offices, tenants, Housing Benefit offices and Estate agents.
• Banks and building societies, they are required to provide details of accounts on which interest is paid over a certain amount. 
• Planning applications in relation to proposed house conversions which are then sold at a later date producing a potential CGT liability.
• Inheritance tax returns, indicating second properties passing under a will
• Looking at and interrogating websites, such as ‘Rightmove’, this site provides the sale and rental information for a property, and an estimate of the capital appreciation of a house since the last transaction
• Increased sharing of information across government departments and overseas institutions
• The Internet
• Bringing in outside expertise from the financial services industry, academia, and the credit reference agencies

How does HMRC use the information used?
Advances in technology and the effective use of date-mining techniques have yielded positive results for HMRC at the moment, and is likely to increase as their skills and competency levels improve.  For example, a check with a credit agency such as ‘Experian’ will show details of loans and mortgages of the taxpayer and people they are connected with as well as identifying any linked addresses.

Bank details may confirm the opening of a new bank account in which a large amount has been deposited. If this ties up with an entry on the Land Registry following the sale of a property, this could possibly mean that a chargeable gain should have been declared on the tax return.
Data mining of the Land Registry can provide me properties sold and acquired by individuals; this can be cross referenced to what if anything is held for that individual in terms of tax records and returns.

HMRC has a new computer system based the Valuation Office Agency in Worthing, West Sussex.  This system brings together information formerly based in District Councils and enables the comparison of data collected such that for example, an HMRC inspector can request a search to provide an historical list of all properties purchased by a landlord, or in some cases members of the landlord’s family.

This list can then be compared with declarations made on the CGT pages of personal tax returns. Properties sold within short timescales are therefore easily identifiable and tax return declarations easily checked. HMRC have had such success with their new system that they have formed a designated compliance unit tasked with targeting ‘tax evading’ property developers and ‘buy to let’ landlords.

How do they choose who to investigate?
Random selections are not that common, more often than not HMRC use a risk based approach to selecting cases for investigations.  The likelihood is that if HMRC contact you to ask questions, it is highly likely they have built up a profile of your financial conduct and behaviour.   

For example, in their publication ‘Closing in on tax evasion’ HMRC, via third party data identified an individual who was found to have 11 undisclosed properties in several Mediterranean countries. The total cost of the properties exceeded €1.3 million despite the individual declaring UK income of just £6,000.

As part of a campaign aimed at medical professionals, HMRC’s computer system ‘Connect’ helped make the links between tax records and data from hospitals, pharmaceutical companies and insurers. This resulted in £33 million in unpaid tax being recovered so far including one case of £1.2 million.

Should I stay hidden or come clean?
I have dealt with a whole range of clients over the years regarding tax evasion and in the vast majority of situations they are not hard-bitten criminals but people who have got trapped in a viscous cycle.  They may not have been initially aware of the need to declare, received incorrect advice or have been meaning to declare income and/or gains but did not get round to it.  As time goes by they get in the habit of not making a declaration but now become worried and anxious regarding the consequences of non-declaration – the advertising campaigns by HMRC are certainly, dramatic and hard hitting and do not help in this respect, but I can understand HMRC’s motivation in doing so.

There are effectively two choices, do nothing and see what happens.  There is a possibility that you may never be discovered, more likely if you are invisible, do not legally exist, have no NI number and every financial transaction you have done is in cash, there is nothing recorded about you in the public domain and you do have not an electronic footprint.  If you are caught, then penalties will be applied more heavily and subject to the nature of the evasion, criminal prosecutions and custodial sentences are more likely.

My opinion is that a voluntary declaration (ideally managed and dealt with by a tax professional) is the best route forward.  The financial consequences will be less, certainly as far as penalties are concerned.  It is the personal impact that is as beneficial, in every case that I have dealt with over the years all my clients have felt such a burden lifted, and even there will be a financial consequence the pain is manageable and they   do not have to worry about the nasty letter or knock on the door.

If I am affected what should I do now?
If you are concerned that you may have undisclosed tax liabilities you should take expert advice on liaising with HMRC, either speak to your existing accountant or contact me at mahmood@proactiveresolutions.com