Self-Assessment for Self-Employed | HMRC Investigations
If you’re self-employed, running a one man operation or a small business, it’s likely that you’ve noticed a few more lovely letters of self-assessment from HMRC in the last few years. Don’t worry… You’re not alone!
HMRC have geared up a number of new campaigns targeting self-reported, self-assessment tax and particular sectors of industry to try and drum up as much cash as they can. In fairness, times are tight, so their actions make sense; but nobody wants to be investigated, and nobody wants to pay more tax than they can justifiably avoid.
So, read on to get an idea of how you can stop an investigation before it gets started!
What leads to an investigation?
The million dollar question is, how do HMRC decide who to investigate, and who to leave alone? Well, the bad news is that by far the most likely ‘victims’ of an HMRC investigation are self-employed workers who take on the responsibility of their own taxes, rather than handing the work to an accountant. That being said, it is perfectly possible to fill in your own self-assessment tax forms and trust in yourself to have gotten it right (if you’re lucky).
In particular, HMRC has admitted that they target specific industries and societal sectors because of the high likelihood of undeclared taxes or undetected tax evasion. Buy to let landlords are one example, as are homeowners who sell their houses without paying capital gains tax. HMRC estimate that each year, £500 million is denied the Treasury by these individuals alone.
It’s also more likely that you will be investigated if you live in certain areas of the country since HMRC likes to concentrate their efforts in particular sectors and locations. Accountants in London have been swamped by the number of self-employed people needing to file their taxes since the number of people outside of traditional employment in the City has ballooned over the past few years. The South East and South West have also seen large increases, as have cities like Birmingham.
So: who is most at risk? The self-employed are by far the highest risk group, whether they work part time or full time. Taxi drivers and consultants have been feeling the squeeze in the last few years as the Treasury takes a harder line on their expenses and incomes. Even people making a small second income from freelancing and car boot sales have reported more and more threatening letters from the Treasury!
The reasons for this are simple. Self-employed people are busy- every minute spent doing taxes is a minute of lost earnings. So, quite naturally, a self-assessment form can end up rushed and hurried. But what does that mean? It means returns can get filed late, it means that there might be spelling mistakes, and it means that there might be mistakes in some calculations too.
On top of this, self-employed people are at the highest risk of inconsistent earnings. If one year, a self-employed person earns £100,000, and the next they only declare £50,000, then HMRC would be all over them like white on rice! Unfortunately, this sort of scenario is a reality for thousands of self-employed small business owners around the country, and it leaves them at risk of a major tax headache every year.
What are HMRC’s new tools of investigation?
But that doesn’t answer how HMRC have managed to up their game in recent years. The newest tactic that HMRC is employing is a Big Brother-style computer system, known as Connect. This system has access to so much data that it’s rumoured to contain more information than the British Library! This computer system is quite simply a cut above their previous methods, and it’s the reason why the number of letters received by self-employed workers about tax seems to be increasing.
Its method of catching tax dodgers is quite astounding. It collates all known information about the British workforce- from DVLA registration records to insurance documents and any financial information that local councils might have. It then analyses the entirety of this data using formulas that are a closely guarded secret, to give HMRC an idea of which sectors are failing to pay enough tax. These formulas, HMRC say, give them a clearer picture than they’ve ever had before of the scale of tax they’re missing out on.
This isn’t the only tool in the HMRC toolbox, however. An old-fashioned method that HMRC still uses is the scare tactic. Their favourite way of scaring tax-paying self-employed workers into coughing up is by giving them an opportunity to pay the taxes they’ve missed, without incurring a heavy fine, if only they can pony up the cash… And soon!
HMRC’s other way of scaring people away from avoiding tax is through prosecution. Of course, not every tax dodger gets hit with jail time; but it happens to an unlucky few. One self-employed full-time eBay trader was recently put in prison for two whole years after not declaring tax on hundreds of thousands of items that he sold on the website. This example, and several others like it, is intended to be extreme because they remind the public that there are real consequences to avoiding tax.
What can I do?
There’s only so much you can do if you’re determined to keep filing your own taxes. Double, triple and quadruple checks of every page are a definite recommendation, although it can be difficult to balance this with the time-consuming task of running your own business. Explaining any major variations in income is also useful: for instance, did your business purchase any new equipment this year, or did you have to take significant time off sick?
But the best way of avoiding an HMRC investigation is to stop doing self-assessments and let professionals do the job. These people make their money with their expert tax knowledge and know exactly how HMRC work. The Accountancy Solutions specialised tax accountants in Birmingham and London, have vast experience in helping the self-employed to save time and money on their taxes. Going the professional route is definitely the best way to avoid an investigation. Let us know how can we help you.