Soon after the start of the beginning of lockdown, restoration of the UK economy has been the prime goal for the government. British government had announced the ambitious packages earlier in the April for the revival of the businesses.
But, the government is much smarter than you think. They will make you pay all the money in terms of taxes and other means later. More obvious are the tax government tax schemes and facilities that are up for grab. So, if you want to avoid corona related losses, it is better that you go into the government funded furlough schemes. Different tactics and practices are in place in different countries.
The US’s Internal Revenue Service (IRS) conducts investigations and detects any kind of tax related tax issues and anomalies. Their system works in a relentless way to gather taxes. Another major example would be the UK’s HM Revenue and Customs (HMRC) which took a lead to expand their tax space to generate more funds.
Let’s take a look at the test case of HMRC of the UK and how they conduct their operations. To avoid any kind of hindrance from the HMRC, businesses must maintain fairness and transparency.
How did HMRC come into power?
HMRC came into operation in 2005. The effective strategies and policies adopted by the organization is narrowing the tax gap. They have played a major role in collecting taxes and fundings from individuals and companies. According to HMRC’s report, the gap stood at a whopping £31bn.
Most of the time, big corporations get the spotlight for tax evasion. An example for it is Google, which reportedly paid only £6m in terms of taxes to the department of Treasury in 2011. Although they had a turnover of £395m.
But, the reality is different as it’s the small businesses and SMEs who pose a bigger risk. They contributed a tax gap of estimated £13.4bnin 2019. The huge number is enough to indicate that the small business sector is the prime target of HMRC.
How HMRC is using ‘connect’ to determine tax?
HMRC’s monitoring power increased multifold after they incorporated a software ‘Connect’ some 10 years ago. This software uses numerous data sources. It actually works to draw a sketch around a taxpayer’s lifestyle, his organisation’s books and his financial dealings. They then find out whether he is paying a sufficient amount of tax or not. This is based upon errors, avoidance, or evasion.
The system is smarter than you think, it can use things such as tax returns and Land Registry. This also includes reports, credit cards, DVLA records, social media, and Google Street View and other platforms to sniff their target. The transparent mechanism makes it fast and powerful at the same time. They wield power over some of the biggest companies like Amazon and Airbnb and can always ask them to hand over data to check if they are evading taxes.
The big data helps HMRC to narrow the gaps. Through the success of the system, HMRC was able to identify the areas where tax collection isn’t enough.
How often does HMRC practice its power?
By seeing all the theoretical aspects, HMRC does hold power. But, the question arises, do they practice it more often? It’s been observed that after the integration of Connect, the tax organization had recovered £3bn in lost tax revenues. The connect software which cost the Government £100m, later recovered the amount 30 times over. So, connect has been involved in unfolding some of the most high profile tax evasion scams. An example for this is the famous case of Robert Fraser Group tax avoidance.
What will HMRC do if you try to hide money abroad?
If you are thinking of transferring your money abroad with illegal means, then you have to think twice. HMRC is now expanding their scope to detect these kinds of evasions. The tax organization is working closely with its international partners to bring international tax transparency.
Tax avoidance and tax evasion
You have to know about the difference between tax avoidance and tax evasion. Avoidance is related to law and it’s wrong interpretation, which is unpleasant though, but doesn’t fall completely into the category of illegal.
But, evasion is something different than fraud and the result is heavy penalties and prison time. Some time ago, people were usually hiding their money on offshore island accounts and it was easy. But, that is not the case anymore, HMRC is now extending their arms and hunting the suspects globally.
How to prevent the investigation?
The best way you can avoid an investigation by the watchdog is to keep your record straight. The investigation conducted by HMRC each year is quite random. But, they go after more frequently where they observe any defects in reporting. These errors may be a subject to some innocent mistakes, but they can’t be red flagged if they aren’t made.
Don’t go into every other tax saving scheme. This is not worth the risk. The investigations are expensive. It can take years to put one to the rest.
It is best to seek professional help
The wise thing is to seek professional help. There are many accountants that are dealing with these sorts of tax affairs. Any professional accountant will be able to guide you on legal tax reliefs and other schemes that would be beneficial for your business.
