Disputes between HMRC and taxpayers are increasing as the tax authority makes greater use of data collected from banks and foreign tax authorities, and more cases head to tax tribunals
The number of cases heard in the First Tier Tax (FTT) tribunal jumped by 43% over the last two years, according to figures obtained by accountancy firm Price Bailey.
There were 7,377 FTT cases in 2017/18, up from 6,559 in 2016/17 and 5,161 in 2015/16.
HMRC has access to increasing volumes of information about taxpayers and has sharpened up its analytical efforts analyse through the use of its bespoke Connect software, which analyses big data, identifying patterns of behaviour and potential taxpayer infringement of the tax rules.
Launched with limited functionality in 2010, Connect has been significantly developed and can access a wealth of data, including financial information from British Overseas Territories, 60 OECD countries as well as numerous other government bodies and financial institutions.
This has provided HMRC with ammunition to challenge many more taxpayers despite having fewer staff.
Richard Grimster, partner at Price Bailey, said: ‘These figures make it clear that despite declining staff numbers and resources, HMRC is much better equipped to challenge taxpayers than it has ever been.
‘The amount of data it is able to marshal allows it to paint a much more detailed picture of an individual’s or a business’s tax affairs. This means that HMRC can instigate a greater number of reviews at a significantly lower cost.’
‘HMRC is now able to spot discrepancies much more efficiently. Its software can automatically check information reported in tax returns against bank accounts and make sure they tally. Previously, checks of this kind would have been laborious and time-consuming but HMRC’s software can spot any inconsistencies swiftly and flag those for further investigation.’
HMRC is under mounting pressure to reduce the estimated £1bn lost to tax evasion each year, and maximise tax revenues, which has seen it adopt a more aggressive stance with taxpayers.
However, the increase in FTT tribunal cases suggests taxpayers are prepared to push back against demands made by HMRC where they feel they have been treated unfairly.
Grimster highlighted the requirement to correct (RTC) rules which mean UK taxpayers must notify HMRC about any offshore tax liabilities relating to income, capital gains or inheritance tax or face a minimum penalty of at least double the tax owed.
‘It is now more important than ever that taxpayers ensure that their affairs are in order. HMRC is particularly focused on reducing tax losses resulting from undeclared income or gains arising offshore.
‘Historically, this was an area that some taxpayers were quite blasé about. With international efforts to share data on taxpayers gathering pace, HMRC is now far better equipped to challenge taxpayers with undeclared offshore income or gains,’ he said.
Report by Pat Sweet, edited by Sara White