2The scope to improve HMRC’s ability and powers to deal with high net worth individuals
Dealing with non-compliance
10.HMRC told us that 98% of high net worth individuals pay professional advisers to deal with their tax affairs and the majority of these advisors are accountants and lawyers. We asked HMRC what it said about this group of taxpayers, given that they take professional advice, that one third of them are under investigation. HMRC told us that a significant proportion of them push at the boundaries of tax law.26 At the start of 2015–16, HMRC estimated that its open investigations had the potential to raise an extra £1.9 billion in tax revenue.27 HMRC estimates that, in 2014, there was around £1.4 billion tax at stake from the use of avoidance schemes by high net worth individuals. Around 1,000 high net worth individuals were responsible for 4,000 uses of avoidance schemes. HMRC estimates that in total there was around £14 billion of tax at risk from all marketed avoidance schemes, which had been used by around 105,000 separate people.28
11.Since 2012, HMRC has issued 850 penalties totalling £9 million to high net worth individuals; an average penalty of around £10,500. HMRC told us that 380 of these penalties were suspended, with a value totalling £4.5 million.29 Penalties are suspended on the condition that the taxpayer complies with their future tax obligations. Twenty-one of the suspended penalties, worth £44,129, were reinstated due to individuals not meeting the conditions.30 HMRC told us that suspending penalties is fairly common practice for all taxpayers and not specific to high net worth individuals.31 HMRC told us it considers a reduction in the number of taxpayers in this group filing late each year and the results of its internal risk assessment, as well as the general reduction in the use of marketed avoidance schemes, provide evidence of improved behaviour amongst these taxpayers.32
12.HMRC has investigated 72 high net worth individuals for potential tax fraud since 2011. In 70 of these cases, it used its civil powers. Two cases were subject to criminal investigation and one of these resulted in a successful prosecution.33 We have previously recommended that HMRC should increase the number of investigations and prosecutions it undertakes, including of wealthy tax evaders, and publicise this work better to deter others from evading tax.34 HMRC has also committed to increase the number of prosecutions of serious and complex tax crime, with a particular focus on wealthy taxpayers and corporates, by 2020.35
Understanding the wealth of individuals
13.Taxpayers have an obligation to disclose their income to HMRC in their annual tax returns, but they are not required to provide information about their property.36 It is the diverse range of property that a high net worth individual might hold that makes their tax affairs more complex and potentially more risky.37 HMRC told us that it has the ability to connect high net worth individuals with property they own personally. However, a particular challenge “is making the connection between a different structure [such as a trust or company] and a wealthy individual”, particularly when these structures are offshore.38
14.Other countries request additional information from the wealthiest taxpayers. For example, in Australia high net worth individuals can be asked to submit an extended tax return and in Japan must submit a statement of their assets and liabilities.39 HMRC confirmed that it had been looking at what further information high net worth individuals could be required to report to help improve its understanding of their wealth. HMRC told us that the results are currently being considered by ministers.40
Image rights
15.HMRC described how the most significant tax risk among footballers was the misuse of tax laws relating to image rights. HMRC told us that case law “established the principle that if you are involved in a sport, you can receive essentially two income streams: one for the playing of sports, and another for the use of image rights”. We heard that most people who believe their image rights have a market value have created companies that receive the payments for those rights. HMRC also confirmed that a significant number of footballers in the UK are not domiciled here. This means they can incorporate their image rights outside the United Kingdom and that payments will be made to companies outside the United Kingdom.41
16.HMRC told us that it has a project team that focuses on the risks associated with image rights. HMRC collects information from football clubs to assess whether the balance between pay and image rights is reasonable. It confirmed that the vast majority, but not all, of the clubs in the Premier League supply HMRC with this information under a voluntary agreement. HMRC told us that 43 footballers, 8 agents and 12 football clubs are currently under inquiry around the issue of image rights.42 HMRC explained that this is not a risk specific to football but also applies to the entertainment industry where somebody’s ‘brand’ can be a valuable asset, and that the project team also examines these people.43 We asked what HMRC thought about the impression given to ordinary taxpayers by the treatment of income from image rights, and whether it had ever talked to Ministers about a potential change in the law.44 The Accounting Officer told us that personally he could see why some would consider the situation on image rights to be odd and merit review. He stressed that the principle of allowing two revenue streams that could be treated in different ways had been settled in law. However, he was sympathetic to the view that HMRC should go back to Ministers to see whether Ministers wanted to continue with the current situation. He said it would certainly be on his list of policy issues to talk to Minsters about.45
Measuring the impact of the unit
17.HMRC’s high net worth unit has increased the compliance yield from its work each year since it was set up in 2009. HMRC told us that in this time it has collected more than £2 billion of additional tax. However, the income tax paid by high net worth individuals has decreased from £4.4 billion in 2009–10 to £3.5 billion in 2014–15, a 20% fall. During this same period, total income tax receipts from all taxpayers increased from £250.1 billion to £272.9 billion, an increase of 9%.46 HMRC was unable to satisfactorily explain why, as a whole, tax revenue from high net worth individuals had fallen, despite the yield from its compliance work with them having increased. The number of high net worth individuals increased from 5,900 to 6,500 between 2009 and 2015. HMRC described how it agrees an annual target for compliance yield, but not for tax revenues.47
18.HMRC has not yet evaluated the effectiveness of its approach to high net worth individuals. It has taken the yields from its work, feedback from tax agents, and changes in behaviour such as fewer late self-assessment returns, as indicators of success. But it has not yet looked at what works and why in its current approach.48 HMRC told us that it thought the NAO’s implicit recommendation that it ought to do a formal evaluation of its high net worth unit to see how it could be improved is a good one. It said that all of the areas highlighted by the NAO, as issues for it to consider when developing its approach, were reasonable. It highlighted in particular the issue of bringing together a wider range of taxes for the individuals concerned, an area in which it already knows it needs to make some changes.49
27 C&AG’s Report, paras 1.10, 3.6
28 Qq 118–124; C&AG’s Report, Appendix One
29 C&AG’s Report, para 3.9
33 C&AG’s Report, para 3.11, Figure 14
34 Committee of Public Accounts, Tackling tax fraud, Session 2015–16, HC 674, April 2016
35 C&AG’s Report, para 3.12
37 C&AG’s Report, paras 1.8, 1.9
39 C&AG’s Report, para 3.5
46 C&AG’s Report, Figures 4 and 8, para 4.3
48 C&AG’s Report, para 18
49 Q 110; C&AG’s Report, Figure 2
24 January 2017