Any business or individual can find themselves under investigation by HMRC at any time. To minimise stress, it is important to know what is involved, what procedures HMRC are likely to follow, and the extent of any penalties that they can impose.
If HMRC does have reason to examine your personal or company’s tax affairs in more detail, it will get in touch initially by letter. Typically, there will be questions about:
- the tax you pay
- your accounts and how you calculated your tax
- your self assessment tax return
- your company tax records
- your PAYE records and returns if you employ people
- your VAT records and returns if you are VAT-registered
The types of tax that HMRC will be enquiring about typically include (but are not limited to):
- Self Assessment Tax
- Income Tax
- VAT
- Corporation Tax
- Capital Gains Tax
- Construction Industry Scheme
- IR35
- PAYE & P11D
- National Minimum Wage
What triggers a tax investigation?
HMRC has a central risk team that uses data mining tools to spot unusual activity on accounts and also monitors trends across industry sectors. Submitting incorrect figures or making mistakes on your tax return is also likely to trigger further questions.
Other reasons HMRC may investigate you include:
- being in a higher risk industry, for example, one with a lot of cash transactions
- a tip off to HMRC
- inconsistencies such as a big drop in income, which could suggest some revenue is being hidden
- persistent late filing of your tax return
- your accounts not being typical of your industry.
HMRC can request to see accounts and tax information going back four to six years. However, the limit is 20 years if they suspect deliberate tax evasion. They will examine your information to see if your version of your accounts and tax return is accurate.
The most important thing to know is that there are three types of inquiry:
- random checks
- aspect enquiries
- full enquiry
Random checks
Random checks can be carried out any time and whether or not you have made errors in your accounts or tax returns. Any business or individual can be subjected to random checks.
Although any investigation by HMRC will be worrying, it is important to remember that unless they find evidence of deliberate evasion, they will, in many cases, not find anything wrong at all. The outcome will be closure of the investigation.
In other cases, the outcome could be the return of any over paid tax, or simply a request for payment of any tax owing, together with interest on the unpaid amount.
If your records are up to date and accurate there is usually little to worry about.
Aspect enquiries
In this case, HMRC will look at a specific areas of your accounts or tax. This is typically as a result of an error, but can be triggered from the reasons mentioned above.
In these enquiries, if your dealings with HMRC have been timely, open and in good faith, an aspect enquiry should not cause major problems for your business. The outcome should then be the same as that in a random check.
Full enquiries
These enquiries are less common and are typically caused by major errors or errors over a period of time. They can also be triggered from the reasons mentioned above.
HMRC will often require a substantial amount of information. In some cases, this can include personal financial information.
Both random and aspect enquiries can be extended into a full enquiry if HMRC finds serious errors or suspects underpayments or tax evasion.
In a Limited Company enquiry, the tax affairs of Directors may also be examined.
How to deal with an investigation
If you use an accountant, HMRC will typically write to them as a first point of contact, often sending you a copy of that communication.
You can also authorise someone other than your accountant to act on your behalf.
HMRC may ask to visit your home, business or adviser’s office. You should make every effort to comply with this request. You will be given a list of information that the Inspector will require and you can request a reasonable amount of time to prepare this information.
If an inspector does visit and you refuse access or do not respond at all to an information request notice, HMRC may be forced to make an assessment. This is likely to result in unpaid taxes, interest and penalties.
In rare cases, HMRC may reconsider this position if you have a reasonable excuse for not cooperating, such as being ill in hospital.
You can ask HMRC to stop the enquiry but must give your reasons. You may also apply for alternative dispute resolution if you disagree with what HMRC is checking and the decisions it reaches.
Once the investigation is over
HMRC may conclude you have paid the correct tax. Or they may decide you have overpaid tax and return the overpayment with interest. If the assessment is that you have not paid enough tax, you will be asked to pay that tax, with interest from the date that it is due. They may also impose a penalty.
Whether or not HMRC levies a penalty depends on why you underpaid tax or overclaimed allowances, whether or not you told HMRC in a timely way, and how helpful you were during the check.
You may also appeal against any decision.
Penalties
The level of any penalty is influenced by whether or not HMRC believes you deliberately evaded tax. They will also consider if you notified HMRC of any errors and how much time has passed since the errors.
If you have a reasonable excuse for a failure to notify HMRC of a liability for tax they would not levy a penalty.
If HMRC judges you to have been negligent in your tax affairs they can fine you up to 30% of the overdue tax.
If you tried to conceal the liability but your disclosure was unprompted you can be fined 20% to 70% of the tax owed. This rises to 35% to 70% if the failure to disclose was deliberate and disclosure only took place after being prompted.
Deliberate and concealed tax evasion can result in a penalty of 30% to 100% of tax owed.
Interest from the date the tax was due will be added.
If you think you are at risk of a penalty, being polite and helpful, and responsive to queries may get your penalty reduced.
For an error to be deemed deliberate HMRC must show you knew about the tax obligation but chose to ignore or evade it. This can be hard to prove in the case of overdue payments as the taxpayer can assert an intention to pay.
Tax evasion
If HMRC decides someone has committed tax fraud, he or she should attempt to make use of HMRC’s contractual disclosure facility. This is an opportunity to make a full disclosure of evaded tax in return for immunity from prosecution. Only individuals can make use of this facility.
What should I do about an HMRC investigation?
As detailed above, being responsive, truthful and volunteering information will all help you. In addition Finsbury Robinson offers investigation handling services and tax investigation insurance.
Investigation handling service
Finsbury Robinson’s accountants are experts in defending clients facing any HMRC enquiry. If you are selected for a tax enquiry, we will aim to settle matters quickly and minimise the final tax liabilities. We offer our office as a venue for any visit as part of this service.
Last year we attended and hosted many such inspections and dealt with a number of enquiries. The costs for dealing with the enquiries ranged from £800 for the simplest to £5,700 for one of the more in-depth enquiries.
Clients with our Tax Investigation Insurance were completely covered for these additional costs.
Tax Investigation insurance
To provide peace of mind, we operate a tax enquiry fee protection service. The service is backed and underwritten by an insurance policy under which we can claim the costs of defending clients in any tax enquiries. This indemnifies up to £100,000 of Professional Fees.
We always ensure that we maintain the cost of this service at a reasonable level , constantly negotiating with the Insurance company for the best deal for our clients.
The policy includes an excellent helpline for advice about health and safety, employment law and legal issues. We use this service all the time and highly recommend that you make full use if it once you sign up.
From 2023 the policy now includes a "Business Hub" full of advice and documents to all areas of HR, Legal, Employment Law and Health & Safety.
Annual costs are:
- Individuals – £80.00 + VAT
- Sole traders – £97.00 + VAT
- Partnerships – £160.00 + VAT
- Limited companies – £180.00 + VAT (this service includes the personal tax of the directors)
You can download our free information pack here.
If you have an enquiry from HMRC then please don't hesitate to get in touch
