Nearly half of tax investigations dropped by HMRC

HMRC investigations into individuals and small businesses last year yielded no returns in 47% of all cases, finds research by UHY Hacker Young

The proportion of investigations which returned no money to the Treasury has risen by over a third, to 47% last year up from 31% the year before, as the number of investigations slowed during the pandemic while HMRC resources were redirected to covid-related activity.

Investigations by HMRC can be highly intrusive into taxpayers’ affairs, starting with seemingly informal questions that can develop into fully-fledged enquiries taking years to close.

Historically, investigations have often come up short, with just two thirds generating additional tax during 2019-20. The previous tax year, 2018-19, marked a three-year high of failed investigations, with 129,000 raising no money for HMRC. This raises questions about the type of taxpayers being targeted by HMRC.

To combat non-compliance and support in its tax investigations, HMRC invested an estimated £100m in software which tracks patterns in taxpayer data across its services. The Connect system was introduced in 2010 to make HMRC’s job at collecting unpaid tax easier by risk profiling individuals and businesses. However, the low success rate of investigations suggests it may be failing to exclude the lowest risk taxpayers.

Graham Boar, partner at UHY Hacker Young said: ‘These statistics show that HMRC is coming up short in too many of its investigations.

‘HMRC has a strong track record in collecting money from additional compliance checks, raising £13.6bn last year. But as it aims to close the tax gap, too many people are getting caught in its net.

‘Taxpayers need reassurance that there is a valid reason for an investigation to be opened into their affairs and that time and stress isn’t wasted on cases that will yield no results.’

Despite half of cases being closed without action, the total revenue HMRC generated from tax investigations and other compliance activity rose to £30.8bn in 2021, up from £28bn in 2020, shows research from multinational law firm Pinsent Masons.

While more than half of investigations are dropped HMRC has a good success rate once it goes to court over tax matters. HMRC’s success rate for tax disputes in courts and tribunals was 86% in the past year, 82% the previous year and 75% in the year before that, analysis by Pinsent Masons shows.

Accountancy Daily