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HMRC opened 300,700 investigations into tax returns last year

What do you need to know as the next deadline looms?

HMRC opened 300,762 investigations into self-assessment tax returns last year, as it continues to come down hard on any mistakes made by taxpayers. So what do you need to know about HMRC’s approach as the deadline for self-assessment tax returns looms on January 31?

Every year, hundreds of thousands of taxpayers make simple mistakes on their tax returns. A mistake make it more likely that HMRC will review a taxpayer’s affairs which leaves them exposed to lengthy, costly investigations.

So how does HMRC identify errors on tax returns? When HMRC receives a tax return, the information is cross-referenced with data already held on taxpayers and any discrepancies act as a red flag for HMRC and can lead to an investigation.

These investigations can lead to HMRC imposing a penalty. Depending on HMRC’s view about how any errors were made, these penalties can be up to 200% of the amount owed. The harshest penalties are imposed when HMRC deems a mistake to have been deliberate.

HMRC is also getting better at identifying any discrepancies on tax returns as a result of it widening the amount of data it collects on taxpayers 

In cases where HMRC thinks there is a high risk of tax being underpaid, HMRC will go so far as to use data to assess whether where a taxpayer lives suggests that they are underpaying tax. For example, HMRC might use Land Registry data, social media and Google Maps to assess whether a recent house purchase or extension could have been reasonably afforded by a taxpayer based on the income they have declared. 

HMRC collected an additional £1.2bn as a result of investigations into self-assessment tax returns during the 2018/19 tax year. With so much additional tax at stake, taxpayers can be assured that HMRC will be on the look out for any mistakes in the coming year.

Another key thing for taxpayers to know is that if HMRC spots a mistake on a tax return, it will likely look into tax returns filed during previous years too – not just the latest one. This increases the chances of finding other mistakes, potentially leading to more penalties.

With the deadline for self-assessment just around the corner, if you’re unsure about any aspect of your tax return, then it is important to seek professional advice. Here are some steps taxpayers can take to reduce the chances of making a mistake:

  • Leave yourself enough time to do the return so you do not have to rush
  • Be clear on what expenses you can deduct and what tax reliefs you can claim
  • Learn from any mistakes you made when filing last year
  • Explain any unusual reductions in your income
  • Check that you have declared all your financial interests, including those offshore
  • Seek professional advice if you are unsure about any aspect of your return

HMRC will be looking for opportunities to investigate you, so don’t make it easy for them. PfP are tax specialists, and you can protect yourself against the cost of most investigations by subscribing.