HMRC compliance checks have become a focal point for businesses and individuals and this week's launch of the online Interactive Compliance Guidance Tool foreshadows a new era of digital tax enforcement.
The compliance check is the central mechanism for ensuring that all taxpayers, from large corporations to sole traders, fulfill their obligations under UK tax law. In other words, make sure they are not under or over paying tax.
The Taxman verifies the accuracy of tax returns and the legitimacy of claims for reliefs or deductions using these checks and the checks themselves can take many forms, ranging from routine document reviews to more invasive on-site inspections when discrepancies arise.
If you are subject to a compliance check there are several key areas under investigation. First, HMRC aims to confirm that tax liabilities are calculated correctly and that taxable income is not being under reported. Second, these examinations target potential instances of tax evasion, where deliberate misinformation might be used to avoid taxation. Lastly, HMRC uses these checks to validate claims regarding tax reliefs and allowances, ensuring that entitlements are not overstated.
HMRC will argue that numerous high-profile cases have highlighted the importance of these checks in maintaining the integrity of the tax system.
The new tool aims to demystify the compliance checking process and reduce stress among taxpayers. It's yet another indicator of the Taxman's modernisation. It uses an interactive format to guides users through a series of questions with step-by-step responses. It's pretty straightforward but answers common queries such as why HMRC might initiate a check, what documents to prepare, and what to do in the event of a dispute or disagreement. For instance, it offers detailed advice on how to challenge a penalty if the taxpayer believes it has been wrongly imposed. Additionally, the tool gives special consideration to vulnerable users, those who may require additional assistance due to health or personal challenges, ensuring that support is readily accessible.
It's no coincidence that such a tool is released this week as several factors have played a part in increasing compliance checks over recent years.
Making Tax Digital
MTD represents a transformative change in how taxpayers record and report their transactions. Now its penultimate testing phase before widespread rollout, it mandates that businesses and self-employed individuals maintain digital records and submit their tax returns via compatible software. It the reason for the end of the tax return as we know it.
While MTD is designed to simplify overall tax management and reduce errors, it also raises the bar for compliance. The Taxman will now be better equipped to identify discrepancies and irregularities in digital submissions. Reports indicate that significant government investment—approximately £1.4 billion over five years—has been directed towards enforcing MTD standards, including the recruitment of an additional 5,000 compliance officers (Wilkins Southworth). The digitisation of records means that even minor errors are more easily flagged, leading to an uptick in targeted audits and checks.
Post-EU Exit Regulatory Changes
Our departure from the European Union presented an entirely new set of regulatory challenges. Businesses engaging in cross-border trade now have encountered a labyrinth of updated customs procedures, VAT requirements, and trade-related regulations. HMRC has not only had to adapt to these changes but has also ramped up its enforcement efforts to ensure compliance with the new rules.
Enhanced checks on goods imported and exported have become routine, with businesses that previously operated under the EU regime now navigating unfamiliar regulatory waters. To stem issues arising from this, HMRC took a more proactive role in remedying any discrepancies.
AI and Other Tech Introduced into Tax Enforcement
The adoption of state of the art technological solutions, including artificial intelligence and big data analytics, has revolutionised the ability to monitor and enforce tax compliance. These tools allow HMRC to conduct more focused and efficient checks, reducing the volume of "noise" and concentrating resources on high-risk areas such as self-employment and IR35 assessments. This is again a reason why the 'Making Tax Digital' system is pushed so hard. The real-time reporting requirement of MTD provides data scientists with plenty of... data!.
This advanced analytical approach means that subtle patterns of non-compliance that previously might have gone unnoticed will be picked up with every data feed submitted by taxpayers. The result will be an increase in the frequency of audits but a more refined targeted approach. The end result, it is hoped, is that the new detection capabilities not only serve to discourage tax evasion but also instills greater confidence in the fairness of the tax system.
While HMRC will be happy with this approach, for many businesses, particularly small and medium sized enterprises (SMEs), adapting to the new digital requirements will be a steep learning curve. Not just because of digital record-keeping demands (4 times a year with an additional final return), but the acquisition of compatible software and thorough overhaul of internal business processes.
What should you do with this increased focus on tax compliance?
Taxpayers should adopt a proactive approach:
- Maintaining meticulous records is paramount. Digital record-keeping should be regarded not only as a regulatory necessity but as an opportunity to streamline overall financial management. Businesses should invest in reliable accounting software that is compliant with HMRC’s digital requirements. Regular reconciliations and audits of financial records can preempt many common errors that trigger compliance checks.
- Seeking professional advice is another key strategy. Whether through hiring an in-house accountant or engaging licensed tax professionals, expert guidance can help ensure that submissions are accurate and complete. Professionals can also offer advice on navigating dispute resolution, should an HMRC decision be contested.
- Understanding your rights and the details of the compliance process can alleviate much of the stress and intimidation associated with tax audits. The Interactive Compliance Guidance tool, for example, provides critical insights into what constitutes a compliance check.
- If a discrepancy is discovered, prompt action is necessary. Addressing the issue early on, either by correcting the error or seeking a professional review, can minimise potential penalties.
- For businesses engaged in cross-border trade, thorough familiarity with post-EU exit regulations is essential. As the rules governing VAT and customs continue to evolve, stay updated.