How diligent is HMRC?

sultanoflondon wrote: »

She even said that if a shop weren't to declare all of their revenue they weren't likely to be investigated.

She's talking complete and unmitigated rubbish.

There are different levels of tax inspector/investigator, lots of different "task forces" working on different kinds of tax avoidance/evasion, etc.

Trainee/Less experienced inspectors "cut their teeth" on smaller issues such as checking bank interest against tax returns, and random checks on small business tax returns. As an accountant of 35 years, these kinds of enquiries are most annoying as they're usually time consuming/costly for the taxpayer/business and usually yield pretty small amounts of unpaid tax.

The task forces are more targeted. There have been cases where takeaways have been targeted with HMRC inspectors counting the number of customers and then checking submitted accounts/returns many months later and also cross-referencing things like the number of takeaway cartoons bought in a month with the number of takeaway meal sales declared in that same month, etc. I also remember one enquiry into a pub where a tax inspector was literally sat in the pub for several nights with a note book making notes of the number of times money was put into a pool table, cigarette machine & juke box, working out average number of customers on each evening and average spend per customer, etc.

More modern inspections often use ratio analysis, i.e. comparing the accounts/returns submitted by similar businesses to compare turnover but also compare overheads claimed, percentages/ratios of cost of goods sold/margins, etc. The basis being that typical/average cafes, cake shops, convenience stores, etc etc will have a similar "profile" in terms of cost of ingredients/purchases per pound of sales revenue.

I think the only thing "your friend" got right was that the chances of enquiry are pretty low, but that's because of the sheer number of small businesses, individuals, etc., rather than any lack of interest on HMRC's part. They've got limited staff, so there's only a relatively small number of enquiries they're able to do. A bit like traffic wardens really - if you park illegally it's luck of the draw whether you'll get a ticket or not as there won't be a traffic warden on every road just waiting for you. But if they come across you, they'll ticket you! Same with HMRC - if for whatever reason you stick your head above the parapet, you've just massively increased the chance of investigation.

https://www.gov.uk/government/news/hmrc-taskforces-raise-more-than-half-a-billion

Examples of some HMRC campaigns include:

plumbers;
electricians;
doctors and dentists;
e-traders;
private tutors;
sale of second homes;
let property;
solicitors; and
second incomes

The second incomes campaign is aimed at those who are employed and have additional income that is not taxed. Second income can arise from activities such as:

consultancy fees from training;
organising parties and events;
taxi driving;
hairdressing;
making and selling craft items; and
buying and selling goods.

Holmes & Knight v HMRC 2018 - HMRC suspected two directors of not declaring all interest and served them with a notice requiring them to disclose personal bank statements.

Although the case was about the 15-16 tax year - when banks were deducting at source. The following year, the Finance Act 2016 introduced the "savings allowance" which now means its paid gross and reported to HMRC to collect any tax due.

But both of which seem to indicate your friend isn't a reliable source for information on law either.