New study highlights regional variations in HMRC’s tax investigation priorities

HMRC’s new penalty regime for late filing and late payments of VAT will be fairer but more complex with interest being charged on all late payments.

Businesses across Britain have been put on alert amid rising concerns over HMRC’s determination to increase tax investigations, which can take months to complete and cost thousands of pounds in advisor fees.

HMRC is taking action against firms that fraudulently claimed furlough and COVID bounce back loans, whilst accelerating scrutiny over Research & Development (R&D) tax credits claims.

“The Insolvency Service recently announced that over 450 directors were disqualified in 2022-23 for abusing the COVID-19 financial support scheme with Markel’s own claims data suggesting that one in 25 R&D claims are now being investigated. We only see this type of activity increasing, especially after scrutiny by the National Audit Office on pandemic performance and HMRC now seeking to claw back cash,” said James Cordiner, Tax Investigations Manager at Markel.

Markel believes three risk factors will act as signposts for HMRC, making them more likely to target certain areas over others for investigations:

The R&D tax credit scheme is an area that has come under significant scrutiny in the last 12 months and continues to be on the increase with HMRC seeking to challenge the validity of most claims.

On average, around 1.6% of businesses made a claim for R&D tax relief in 2020/21, meaning that Northern Ireland, the North East, London, the North West and the West Midlands came in at above average.

The Covid Bounce Back Loan (BBL) Scheme has been beset by fraud, increasing HMRC’s focus in areas where a large proportion of businesses took out a loan, according to Markel Tax.

The national average percentage of businesses taking out a BBL across all regions is 25.7%, which is the benchmark against which we can compare the percentages for each region.

Northern Ireland (NI) had the highest percentage at 30.9%, which suggests that businesses in this region may have been more in need of financial support during the pandemic. London has a relatively high percentage at 28.3%, which could be attributed to its status as a major economic hub with a higher concentration of businesses.

Overall, Northern Ireland, the North East, the North West, London and Wales were all higher than the national average of 25.7% of businesses taking out a BBL.

London and the South West stand out as the only regions with a significantly higher proportion of the workforce being furloughed compared to the 13.6% national average. This indicates a higher impact on employment in these areas.

HMRC tax investigations can be incredibly intrusive for businesses. Markel estimates that a typical enquiry lasts for between 18-24 months, with client firms paying in the region of £5,000 in excess accounting fees. At a time when inflation and the cost-of-living crisis is creating a highly challenging environment, this additional pressure could prove disastrous for employers across the region.

In last year’s budget statement, the Chancellor announced an additional £1 billion for HMRC over the next four years to tackle tax evasion and fraud, including investment in technology and additional staff to investigate cases. HMRC has also taken action to address the shortages in staff numbers, and recently recruited 4,800 new compliance staff, leading to 2,500 more in full time employment than in 2021–22.

“It is right that HMRC seek to recover the correct taxes from the right businesses but in doing so they will inevitably target businesses that may have done nothing wrong and are struggling financially. It is important to ensure that any check by HMRC is defended appropriately based on the facts of the case,” concluded Cordiner.