This article first appeared on This is Money – please click to view

Heather Rogers is the founder and owner of Aston Accountancy and This is Money’s resident tax expert.

We’ve all probably been asked to pay in cash rather than by bank payment for a job or service at least once.

And it is a myth that has circulated for many years that HMRC won’t find out about ‘cash jobs’ or other undeclared income, even though it has many ways to do so.

The majority of businesses and individuals declare their income correctly, but there are some that don’t.

The rise in people paying via an app, debit card or credit card, which suits the customer better, has reduced the use of cash.

However, it hasn’t stopped tax dodging and those determined to avoid declaring all their income will try to find a way.

So, what counts as tax evasion, how does HMRC catch people out, and what should you do if you are – wrongly or rightly – suspected of it.

What is tax evasion?

Tax evasion at its simplest is deliberately not paying the tax due on income.

This doesn’t just relate to cash. And it can apply to any tax, including VAT, capital gains, income tax, import duties, and inheritance tax.

It is illegal and has serious consequences for those who are found guilty; depending on the circumstances, this can range from financial penalties to imprisonment.

You will also have to pay the tax due, interest, and any other penalties levied.

Tax evasion falls within the definition of money laundering, which under the Proceeds of Crime Act 2002 means that assets purchased with the proceeds of crime can be seized.

Accountants and solicitors have to implement strict anti-money laundering policies and are legally required to make a report if they suspect a client of engaging in money laundering.

Tax evasion can come in many forms but here are a few common examples.

– Not declaring rental income you receive or not declaring that you have sold a rental property or second home

– Undeclared cash or cryptocurrency transactions

– Not reporting trading activities of a business

– Claiming false expenses to reduce profits, or not declaring all the sales

– Avoiding import duties

– Tax avoidance schemes

– Not reporting all your income to avoid registering for VAT

– Employing someone but not operating a payroll or not paying PAYE to HMRC

If HMRC suspects that you have not declared all your income, it might open an enquiry into your affairs.

How does HMRC know that someone might be evading tax?

HMRC has many ways to find out as it receives information from a great variety of sources.

– Your employer via mandatory payroll filings on your pay, benefits and expenses

– Financial institutions and banks, both at home and overseas

– Companies House

– The Land Registry

It can also use open source intelligence – known as OSINT – to gather information from online market places and sometimes social media accounts, websites and other available online information.

What if you pay someone ‘cash in hand’, not knowing if it will be declared – can you get into trouble?

Some firms will offer a ‘cash discount’. This is aimed at receiving payment promptly, and means you will pay less if you pay before the due date, as a percentage discount will be applied to the amount due. 

This is a normal business transaction and perfectly legitimate.

However, suggesting to a business that you will pay cash in order to receive a discount on the grounds the business will not declare the cash is a completely different matter. 

Assisting tax evasion and by that, aiding money laundering, is a serious offence. The business owner might also refuse to provide services following such a suggestion. 

In fact, many businesses now won’t accept payments in cash, other than small amounts, due to the money laundering regulations, to which many businesses are subject.

How will I know if I am suspected of not paying the right amount of tax?

You will receive a letter opening an enquiry into your affairs.

This could be to deal with just one part of your income, where for example HMRC has information you have not reported some interest or a pension. Or, it could be a full enquiry into your affairs.

If you have concerns, or if it is a full enquiry, you should immediately seek advice from an accountant who is experienced with enquiry work (see the box below on finding an accountant).

Most HMRC enquiries are civil, or in other words they are not criminal enquiries.

Fraud cases, where deliberate tax evasion is suspected, are usually investigated through HMRC’s Code of Practice 9 (COP 9).

You will need a specialist accountant or tax practitioner or a tax lawyer to handle a COP 9 enquiry. In serious cases, HMRC may open a criminal enquiry.

What powers does HMRC have?

HMRC can do the following.

– Apply for orders requiring information to be produced

– Apply for and execute search warrants

– Make arrests

– Search suspects and premises following arrest

– Recover criminal assets through the Proceeds of Crime Act 2002

Its civil powers are detailed in schedule 36 of the Finance Act 2008.

How far back can a tax investigation go?

Without getting into complexities, basically, HMRC must normally enquire into a tax return they suspect to be incorrect within 12 months of the date they received the taxpayer’s return. However, if errors are found in that they can go back as follows.

– Innocent errors – four years

– Careless errors – six years

– Offshore income errors – 12 years

– Deliberate errors – 20 years

So, even if you make an innocent error in a tax return which is subject to an enquiry, you could find that you are being assessed on up to four years of additional tax.

If this happens, always seek professional advice from an accountant, tax specialist or tax lawyer, as often HMRC’s discovery assessments can be ambitious on those earlier years.

It is important to pay the tax you owe but it is equally important to ensure that HMRC has not made incorrect assumptions about earlier years, the facts of which may give to rise to a different position from the one HMRC has determined.

It is also important to note that HMRC is not permitted to go on ‘fishing expeditions’ and must be able to demonstrate to the tax tribunal, if challenged by the taxpayer, that a discovery assessment for unpaid tax was correctly raised for earlier years.

You can appeal if you disagree with the assessment(s) raised.

What if you belatedly realise you made an innocent mistake on your tax return?

You can refile your tax return online within a year of the due date. For 2022/23, the due date was 31 January 2024 for online filing, so you have until 31 January 2025 to file an amendment. You will pay interest on any extra tax owed.

If you miss the deadline, then you will have to write to HMRC, or send in an amended return on paper explaining the circumstances as to why this happened. You may receive a penalty but this will depend on why the amendment is required.

What if you deliberately didn’t tell HMRC about some of your past income and want to come clean?

First of all, take advice from either a specialist accountant, tax practitioner or tax lawyer.

They may advise you to use the HMRC online disclosure facility. There is a separate disclosure facility for overseas income. Making a disclosure can reduce the penalties levied.

What are the penalties for tax evasion?

It depends if the penalty was due to lack of reasonable care or whether it was deliberate, or deliberate and concealed.

Deliberate and concealed is where you try to cover your tracks to try and avoid detection.

Lack of reasonable care can mean a penalty of up to 30 per cent of the tax due, deliberate up 70 per cent and deliberate and concealed up to 100 per cent. (That is on top of the tax owed and interest.) You can appeal the penalty if you disagree.

Criminal cases can lead to imprisonment.

However, if you find yourself the subject of an HMRC enquiry, for whatever reason, it does not mean you have done anything wrong.

Always take advice from the right professional. The more serious the enquiry, the more experienced a professional you will need. This can be costly, so if you have not told HMRC about income you receive, do it now.