Tax & Accounting News

HMRC’s Risk-Based Approach

23/10/2009

HM Revenue and Customs (HMRC) is adopting a new approach to determine which taxpayers are subject to the most scrutiny over their financial affairs.

The department is dividing taxpayers into two categories – ‘low risk’ and ‘not low risk’, and while the former’s tax returns will not normally be challenged, those in the latter category are likely to find themselves facing varying degrees of investigation from the authorities.

How a taxpayer is categorised will largely be determined by their behaviour, with the following factors likely to be taken into account:

• How the taxpayer reacts to HMRC enquiries
• Whether there is an aggressive approach to mitigate tax
• The use of avoidance schemes and the level of disclosure
• Timing and quality of response to HMRC enquiries
• The systems the taxpayer uses

With less reliance on rolling audits, HMRC’s risk-based approach is dependent on electronic filing, supported by a data mining process for risk profiling. It will not necessarily be apparent to HMRC whether the information is being provided by a third-party advisor, but taxpayers will be held responsible for the service the advisor provides on their behalf.

Furthermore, this year’s Budget placed new obligations on Senior Accounting Officers to take ‘reasonable steps’ to put in place and monitor accounting systems which support accurate tax reporting, and the named individual is required to certify each year that the company had appropriate arrangements in place. Companies and even individuals can be penalised for careless or deliberate errors, making it even more important to ensure that tax procedures are watertight.

In complex tax cases, it may be advisable to contact HMRC and instigate dialogue at an early stage, to demonstrate to HMRC the robustness of any systems in place, and hopefully prevent problems later.

For more information please contact us.