Taxpayers hit by spiralling costs as cases drag on
Almost a quarter (23%) of all tax investigations launched by HMRC's local offices* are still unresolved more than 12 months later, says RPC, the City law firm.
RPC says that of all local compliance cases currently open with HMRC, over 3,800 are still not completed over three years since they began.
HMRC's Local Compliance unit currently has over 115,000 tax investigations open against individual taxpayers and businesses**.
RPC says that prolonged HMRC investigations generate a great deal of uncertainty for taxpayers; it is normally the case that HMRC will give no indication of how long it will take for the enquiry to complete and whether any additional tax will be demanded.
RPC says that HMRC investigations can also occupy large amounts of time and resource for both individuals and businesses.
Adam Craggs, Partner and Head of RPC's Tax Disputes team, explains:
"Prolonged enquiries by HMRC impose a substantial burden on individual taxpayers and businesses.
"Regardless of the outcome, those being investigated will have to bear the burden of the costs associated with dealing with HMRC and this can entail substantial professional fees."
RPC adds that HMRC's 'Connect' database collates information from multiple public and private sources which can be inaccurate in its targeting of individuals for investigation.
For smaller businesses, in particular, these investigations can have a considerable impact on day-to-day operations as a large proportion of senior management time may have to be devoted to dealing with matters raised during the investigation.
RPC adds that this burden on small businesses is unlikely to lessen as HMRC is under continued pressure from the Government and is showing a renewed determination to maximise revenue.
As announced in the Chancellor's Summer Budget, HMRC is also set to receive an additional £750m from the Treasury in order to crank up its tax gathering capacity.
Calls for HMRC to introduce time limit for investigations to help speed up complex investigations
RPC says that as complex tax investigations can often take several years to reach resolution, the process could be accelerated by introducing a time limit or "cut-off" point, by which time the enquiry must be concluded.
Adam Craggs explains: "Introducing a more transparent timescale would ensure that HMRC completes its enquiries in a timely manner thus keeping costs and disruption to taxpayers and businesses to a minimum.
"Currently, the only way to force HMRC to conclude a long-running enquiry is to apply to the tax tribunal for an appropriate direction."
RPC adds that HMRC previously had an incentive to close an enquiry in order to make a demand for tax. However, with the introduction of Accelerated Payment Notices (APNs), once HMRC are in receipt of the disputed tax, there is little incentive for them to progress matters.
* Investigations commenced by HMRC's Local Compliance unit.
** As of 2 March 2015, latest figures available.