HMRC is rubbing its hands together in glee after increasing the amount it collects from its compliance work.

In the last 12 months, HMRC’s income from investigations into tax avoidance and tax evasion rose to £16.5 billion. That’s a 37% increase on the last financial year.

Accountancy firm UHY Hacker Young said the increase was a result of the taxman adopting a more aggressive approach. Enquiries into corporation tax provided the Revenue with £4.6 billion, whilst VAT inspectors brought in £6.2 billion – up 92% on the previous year.

According to UHY Hacker Young, the government believes that if it keeps on investing in tax inspectors, the extra money will continue to flood in. In reality, a lot of businesses settle up because they feel intimidated by HMRC.

Roy Maugham said the Revenue’s aggressive stance is going some way towards helping reduce the budget deficit. However, the downside of this is that the Exchequer will find it harder to work out the total cost of compliance and the UK will become a less attractive place to do business.

A lot of UK companies have already moved their headquarters overseas to countries like Ireland, Malta and Switzerland, he continued. They have done this to escape the high business taxes in the UK and HMRC’s aggressive attitude to tax collection.

The Treasury could lose out in the long run as the lost revenues from companies relocating overseas outweigh the revenue brought in from increased compliance activity, Maugham concluded.

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The tax gap shrunk slightly to £35 billion over the last 12 months, according to the latest data from HMRC.

In the financial year 2009-10, the amount of tax that remained uncollected due to tax avoidance and evasion was 7.9%, down 0.2 percentage points on the previous year. Whilst this might sound like a lot, it is actually lower than a lot of countries who publish tax gap data.

David Gauke, the exchequer secretary to the Treasury, said that HMRC continues to show good progress in closing the tax gap, but we must not become complacent. Over the last few weeks offshore tax evaders have been challenged, tax avoidance loopholes closed and a new unit set up to make sure the UK’s richest individuals pay the tax they owe.

However, some tax experts say it is difficult to get a realistic assessment of the size of the problem because HMRC uses tax figures that are four years old in its calculations.

Heather Self, from McGrigors, said that calculating a tax gap for VAT was simple, but when it comes to direct taxes like corporation tax and income tax, it’s a different story.

She went on to say that the Revenue must make sure it does not trample on innocent taxpayers. Over the last few years, HMRC has made some errors and become more heavy-handed and she is concerned that the added pressure to reduce the tax gap may see it adopting a blunderbuss approach.

HMRC loses £6 million a year due to simple errors and carelessness on the part of taxpayers, according to the CIoT. This news led the Institute to recommend all small businesses seek professional help when it comes to bookkeeping.

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HMRC recently announced that five plumbers have been arrested as part of its crackdown on unpaid tax. In addition to the arrests that took place during raids in Hampshire, London, Middlesex, Surrey and West Bromwich, a further 500 investigations are ongoing.

Earlier this year, the Revenue sent letters to 50,000 people working in the plumbing sector warning them they would face large fines if they did not settle their tax liabilities. HMRC thought that some plumbers were moonlighting and receiving cash in hand without declaring tax. Anyone who owned up before the May deadline was fined up to 20% of the tax they owed.

HMRC then raided those who did not come forward initially to make sure they pay their outstanding tax. It is thought that some individuals owe as much as £150,000.

John Pointing from the Revenue said these arrests were the culmination of many months work and warned that more raids will take place in counties across the country including Cambridgeshire, Kent, the Midlands, Tyne & Wear, Yorkshire and South Wales.

Previously the CIoT had said that the Plumbers Safe Tax Plan campaign was not publicised enough and some plumbers were unaware of its existence. However, HMRC has now stepped up the pressure.

Gary Ashford from the Institute said the Revenue as only had limited success with its medical and plumbers’ voluntary disclosure opportunities, so now they are adopting a tougher stance with those who did not come forward. HMRC holds a lot of information and it is now starting to use it.

The government claims that it loses £45 billion every year through undisclosed taxation in the UK and HMRC has now been given £917 billion to tackle tax avoidance and tax evasion.

Plumbers who did come forward and make a disclosure have until the end of this month to pay up in full or make arrangements to pay their outstanding tax liabilities.

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Contractor accountants may want to encourage their clients to register for VAT if they are eligible to pay it and have not already done so.

HMRC recently launched a new campaign to persuade firms that trade above the £73,000 turnover threshold to get their house in order. Businesses that take up the offer will receive softer late payment penalties, whilst those that do not will face substantial penalties and possible criminal prosecution.

The Revenue is to send out at least 40,000 letters to companies telling them how they can register and settle up outstanding liabilities. Firms have until the end of September to make a full disclosure and the majority of them will receive the low penalty rate of 10% on their overdue VAT payment. Furthermore, they will be given the opportunity to disclose other tax arrears in return for a lower than normal penalty.

Once this amnesty had ended, HMRC will begin investigating any firms that have not made a voluntary disclosure. The Revenue has received £500 million already from voluntary disclosures made during three similar campaigns.

HMRC’s Mike Wells, has urged people to come forward and take advantage of the best possible terms. The outstanding VAT, plus any penalties, needs to be paid no later than December 31st.

HMRC has also warned taxpayers that they will not get away with defrauding the tax system. The department’s assistant director of criminal investigation, Martin Brown, said HMRC is cracking down on fraud and has received additional money from the government to help fight tax avoidance and tax evasion.

He made his comments after a “self-styled Lord”, Gregory Roberts, admitted attempting to defraud the Revenue of £3.5 million from falsified documents.

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New research has estimated that 7% of SMEs deliberately evade tax and more than one in three small enterprises would willingly understate profits if they believed they would not get caught.

HMRC is about to launch a new assault on small businesses it believes are evading taxes. The Revenue believes that small enterprises are responsible for the around 50% of the annual tax gap – the difference between what it collects and what it thinks it should collect.

HMRC’s research shows that around 35% of the 4.8 million small businesses in the UK are “attitudinally non-compliant”. These firms are likely to take a casual attitude towards record keeping and believe that tax evasion was acceptable. The study also discovered that out of every five firms that are tempted to break the rules, one would actually do so.

However, small businesses could well be concerned if HMRC inspectors are working on the assumption that a large number of taxpayers want to cheat.

The Revenue on the other hand says its compliance policy aims to encourage taxpayers to get it right. The director-general of business tax, Melanie Dawes, pointed out that 93% of SMEs are not evading tax and the department wants to support honest firms by reducing administrative burdens.

The most common forms of evasion amongst SMEs include failure to record some transactions in the books and not deducting NICs and tax from employees’ pay.

Inspectors are due to start visiting small companies in the second half of this year to check their records. Fines will be levied on firms with significant record-keeping failures.

HMRC is also going to crack down on companies that should be VAT registered, but aren’t. The current threshold for VAT registration is £71,000.

The government earmarked £900 million to help HMRC crack down on tax avoidance and evasion and more than half of this money is being targeted at the small business sector.

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Dave Hartnett, HMRC’s permanent secretary for tax, recently confirmed that the taxman’s approach of targeting specific professions has raked in vast amounts of previously unpaid tax.

He said the Revenue has had great success by targeting people, including the clients of some online accountants, with offshore bank accounts and targeting sectors, like the medical profession, has been very fruitful.

The latest tax amnesty has been aimed at the plumbing sector. HMRC offered lower penalty rates to those willing to declare unpaid tax. The Revenue has also set up task forces to investigate London’s restaurant trade and these will soon be rolled out across the entire UK.

Contractor accountants with clients in the restaurant trade may want to encourage restaurant managers to get up to date with their record keeping. HMRC will expect to see till rolls, cheque stubs and records of sales and takings. The taxman is also likely to take an in-depth look into gratuities received by waiting staff. Tips are often undeclared but as the Revenue toughens its stance on cash payments, waiters could find themselves in the spotlight.

£917 million has been ring fenced to tackle tax avoidance, tax evasion and fraud this year and the Revenue hopes to claw back £7 billion every year within 4 years.

HMRC is also planning to launch an initiative to catch individuals and businesses who have not registered for VAT.

The scheme is due to start in the summer and the Revenue is already having discussions with interested parties. Mike Wells, the director of risk and intelligence at HMRC, said the department wants to gain as much insight as it can into the opinions of people and organisations so it can implement these into the campaigns it designs for its customers.

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I‘m spending quite a lot of time these days sitting on the train between home and work. It’s not enough time to do the Times crossword, nor to dig out the laptop and do half a day’s work. Even if it were the “aircraft-style seating” is exactly that, too cramped to allow you to do anything apart from sit and stare out of the window.

Doing that, you can’t help but notice the huge amount of hardware that is spread around the edges of our railway system. There are boxes of all sizes, some with arrays of cabling, some seemingly freestanding. There are odd little plaques on station platforms next to the track with sliders on that serve no obvious purpose. Some boxes are labelled but many are not. And all this on top of all the signals and points and speed limit signs and so on. you expect to see anyway.

And all this complexity so you can get on a train, be moved though a series of connections and arrive within two feet of where you got off yesterday. In other words, that complex infrastructure doesn’t impact on you in the slightest; you can get to where you’re going without having to think about it at all.

So what a shame that same approach doesn’t apply to legislation…

I’ve been looking at two different set of documents recently, the clarification of the Agency Workers Regulations and some of the material around the latest position on ICTs. These are complex subjects, admittedly, but in essence the aim of the documentation is to allow you to determine to what extent the relevant legislation affects you personally. And I think both have failed in that aim.

The AWR guidance, apart from containing more typos and grammatical errors than I’ve seen in a hundred other HMG papers combined, is bafflingly opaque on perhaps its most fundamental question: am I as a freelance with my own company in scope of these regulations or not? Nope, no idea…

The reason, apparently, is because the authors want to be able to exclude artificial avoidance measures taken by the unscrupulous. They do this by including lots of fuzzy wording that’s open to interpretation. So to pursue the railway analogy, the points may be set to take you to Wales, but you may still end up in Cornwall. Why, nobody knows.

It’s the same with ICTs. The criteria are clearly stated: for example, work here for up to 12 months and you have to be paid £24,000 a year in salary. Except they haven’t defined “salary”, they haven’t defined what allowances go to make up that salary and some of their attempted clarifications are actually mutually exclusive.

Now these documents have been written by clever, educated people who have a solid grasp of the matter in hand. You have to conclude that the ambiguities in the documents are deliberate. You may accept that this is to minimise the risk of avoidance of the rules, but I’m afraid I don’t. As I said to my previous MP when debating the Arctic case, the best way to avoid people breaking the rules is the make the rules binary. You can’t really apply uncertainty theory to a set of points and expect to end up on the right track.

All in all, it’s a hell of a way to run a railway.

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Since its launch in 2009, the Liechtenstein Disclosure Facility has yielded HMRC £140 million, the government department’s latest figures have revealed.

Originally, the Revenue expected to yield £1 billion from the LDF by 2015 but the figure has been revised to £3 billion after the encouraging uptake.

By the 31st March this year, 1,351 people had registered their intent to take advantage of the lower penalties offered by the LDF. In March 2010, just 419 registrations had been received.

Phil Berwick from McGrigors pointed out that there has been a consistent increase in the number of registrations but he still believes HMRC will not reach its revised £3 billion total.

He went on to say that uncertainties surrounding a possible deal with the Swiss government is preventing people coming forward. As soon as the deal is announced, more people will have an incentive to register.

The head of tax at law firm Lass Salt Garvin, Frank Strachan, said it will be interesting to note whether more people will sign up by this September. He also remarked that clients are waiting to know the details of the Swiss arrangements before signing up.

Meanwhile, HMRC took another step in the right direction in its battle against tax avoidance after winning a case in the Supreme Court.

The case involved offsetting capital allowances on software purchases against income which left the partnership in question with a minimal tax bill. HMRC claimed the partnership had artificially paid too much for software rights and recycled the money back into the company to repay a bank loan.

Although the Court of Appeal had previously ruled in favour of the partnership, the Supreme Court said it had to consider the real cost of the software.

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The Finance Bill (2010) has laid down specific provisions for MPs regarding tax avoidance, although one tax expert says there is no obvious reason why this should occur.

Grant Thornton’s tax director, Mike Warburton, made his comment after it emerged that section 554E (8) of the Finance Bill included a clause saying that the disguised remuneration legislation did not apply to members of the House of Commons.

The new legislation on disguised remuneration schemes such as Employer Funded Retirement Benefit Schemes and Employee Benefit Trusts is intended to stop the complex arrangements some employers have been using to avoid income tax. Warburton said he found it difficult to understand why MPs need this exemption.

A spokesman from HMRC said the Independent Parliamentary Standards Authority makes payments to MPs so that they can carry out their parliamentary responsibilities. These payments have been excluded from the new legislation because they are not tax avoidance. However, arrangements made by other third parties were not excluded from the new regulations.

The tax avoidance rules are thought by many to be too complicated and it is not clear which benefit schemes are covered by them.

The government has also closed the loophole that allowed people to avoid tax through the Qualified Registered Overseas Pensions scheme. QROPS lets people who relocate overseas to liquidate their UK pension. However, it was discovered that there was a clause in an agreement with Hong Kong that allowed people to transfer their pension there but still remain a resident of the UK. This legislation has now been changed in the Finance Bill.

Exchequer secretary, David Gauke, said the coalition has a clear strategy for combating tax avoidance and it will take action against anyone who takes unfair advantage of tax loopholes.

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Contractor accountants may be interested to learn that the coalition has decided to adopt a more novel approach to tax avoidance.

The Treasury released their “Tackling Tax Avoidance” paper last week and it won quick approval from the CIoT. The Institute has been campaigning for changes to the government’s stance on retrospective tax changes for some time and is delighted that the retrospective approach has finally been dropped.

Vincent Oratore, the president of the CIoT, was delighted that the organisation’s concerns had been listened to and said SMEs and contractors will welcome this new approach as it provides them with greater certainty.

Wealthy individuals who have been able to cut down on the amount of stamp duty paid on expensive residential properties will find that loophole now closed to them. In the past, millionaires have been able to set up a company and make it the legal owner of their mansion thus avoiding a large portion of stamp duty. The Treasury estimates it will rake in an additional £30 million every year by putting a stop to this practice.

The government has now made three property related schemes illegal. Two involved buying a property through a financial institution and the third involved taking a long-term lease, of anything up to 999 years on a property, rather than buying it outright.

George Osborne also intends to raise a further £750 million by clamping down on disguised remuneration schemes.

Whilst it is understandable that the government wants to tackle tax avoidance, experts claim that tax evasion and other criminal activity have a much greater impact than legal avoidance.

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The European Commission has requested that the UK amends its anti-avoidance and tax evasion measures.

Last week, the EC said that regulations regarding the attribution of gains to non-UK resident firms and the transfer of assets abroad were disproportionate. The Commission added that the UK regulations go beyond those that are reasonably necessary in order to prevent tax avoidance.

David Kilshaw, the chair of KPMG’s private client practice, said this could be a serious threat to the Treasury’s revenue as it concerns a significant amount of tax.

Current provisions allow for HMRC to review offshore structures and tax individuals holding assets in them at the personal tax rate. However, the EC says this is discriminatory as individuals are not liable to pay tax on the assets of a UK based company.

The EC also wants the UK to change the regulations regarding cross border capital gains. At present, if a company that is UK resident acquires a share greater than 10% of a company in another EC state, and that company sells an asset and realises capital gains, the UK company is liable to pay corporation tax on these gains.

Kilshaw also warned that HMRC might start to tax UK companies at a higher rate if it is forced to tax them the same as offshore companies.

If the UK does not comply with the request, the matter may be referred to the European Court of Justice.

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Public sector tax fraud costs the Treasury an estimated £15 billion every year according to the National Fraud Authority.

This estimated public sector fraud figure is made up on £7 billion lost due to tax evasion, £5 billion by criminal activity and a further £3 billion that is stashed away in the hidden economy.

The Fraud authority’s figures also show that the total amount of fraud in the UK tops £38 billion and £21 billion of that is down to the public sector. In the private sector, the financial services sector has the highest amount of fraud at £3.6 billion whilst the fraud losses attributed to SMEs were £780 million.

The data proves that tax evasion is definitely the largest problem area, far overshadowing the £1.5 billion lost each year in benefit and tax credits fraud.

Last week, Ricards Virokaitis, a Lithuanian living in south-east London, was jailed for five years for his part in a £3 million tax credit theft. An HMRC investigation found that he was a central member of a gang who paid more than 100 women from Eastern Europe to enter the UK solely with the intention of registering for tax credits and benefits. The women were escorted by Virokaitis and his criminal gang while they claimed the benefits. The women then returned home and Virokaitis withdrew up to £90,000 each month through bogus bank accounts. Women with children were deliberately recruited in order to obtain the maximum benefits, an HMRC spokesman said.

The assistant director of criminal investigations at the Revenue, Simon Grunwell, said the HMRC is cracking down on benefit fraud and has received an additional £900 million from the government to tackle tax avoidance, evasion and criminal attacks. Criminal gangs such as Virokaitis’s are a menace and their activities are hurting honest taxpayers.

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