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Investment in tax investigations set to increase as HMRC sees "tremendous value" from compliance efforts, says expert

HM Revenue and Customs (HMRC) looks set to increase spend more on tax investigations after the department secured an additional £5.9 billion from large businesses last year.14 Jan 2015

Figures obtained by Pinsent Masons, the law firm behind Out-Law.com, showed that HMRC recovered an additional £97 for every £1 spent on new staff for its large business compliance service last year. Units responsible for investigating individual high net worth taxpayers and small businesses also reported significant increases in tax take, according to the figures.

"The kind of returns that HMRC is getting on its increased investments into tax investigations would be seen as mouth-watering by the average private sector business," said James Bullock, a tax expert at Pinsent Masons.

"Securing £5.9bn in extra tax from investigations into large businesses for expenditure on compliance staff of just £61 million means that chancellor is getting tremendous value from these teams. It also suggests that additional funding for investigation will focus on investigations into medium-sized and larger businesses," he said.

Every £1 spent in 2013/14 by HMRC's Large Business Service (LBS), which deals with the UK's largest and most complex businesses, resulted in the recovery of an additional £97 that year; up from £87 for every £1 invested in 2012/13, according to the figures. The local compliance unit, which handles smaller businesses, and the high net worth unit, which is responsible for the tax affairs of wealthy individuals, collected an additional £18 for every £1 spent in 2013/14, up from £16 in 2012/13, according to the figures.

However, Bullock said that although this increase in activity was good news for HMRC and the government, it could also lead to "increased uncertainty" for businesses and a backlog in unresolved tribunal disputes.

"This is not such good news in terms of making UK plc a business-friendly environment," he said. "In particular, it has led to an increased backlog in disputes and appeals, which threatens to cause a real problem."

The number of tax disputes awaiting a tribunal hearing is now at a record high of 27,246, according to HMRC figures. This figure includes an increase in the number of high-value disputes that must be heard by the Upper Tax Tribunals. Over the last year, 267 new cases were lodged with the Upper Tribunal; an increase of 32% on the number of cases lodged the previous year and almost four times as many as five years ago, when 70 new cases were lodged with the Upper Tribunal.

"To achieve a more reasonable time frame for tax cases, HMRC needs to adopt a more pragmatic approach and start negotiating deals," Bullock said.

"The Treasury has been providing the funding for tax investigations but it now needs to give political support to HMRC in dealing with the backlog. A long wait for a tribunal case to be heard is not as much of an issue for HMRC as it is for a taxpayer that has already had to pay the tax that is in dispute," he said.