Many taxpayers and small business owners will be feeling uneasy after reading online chat and news stories about expanded HMRC powers to look into bank accounts, find out about online trading and trawl through vast mounds of data with the help of AI.
Anyone not on PAYE will inevitably be wondering if the taxman’s increasingly all-seeing eye will alight on them, and what will happen next if it does. So, while a tax investigation is worrying for even the most careful, it is much less so if you know the extent of HMRC’s powers, how to avoid being investigated and what to do if the worst happens. Is there any baby news?
What are the signs a company is under investigation?
HMRC does not have to tell individuals or companies that it has begun to investigate them and an investigation will often begin in a softy, softly kind of way with a request for a compliance audit that seeks more information about a tax return or property transaction. You will not be notified of the lead-up to this request.
If the taxman is not happy with the answers, the investigation will be expanded into one of three types.
Full inquiry
All your business records will be scrutinised. Often this will be when HMRC thinks there has been a significant error in your return; it won’t necessary be assuming there has been an attempt at evasion.
In the case of limited companies, directors’ own tax affairs can be scrutinised as well.
Aspect inquiry
Here only a part of your tax return will be investigated, possibly as little as one section of your return
Random check
As the phrase suggests, HMRC will investigate a company or individual for no particular reason.
What could trigger an HMRC inquiry?
Cash businesses are more likely to be investigated. Tax officers will also home in on:
- businesses that have fewer cash transactions than is normal in their sector;
- late filers;
- people with errors in their returns;
- businesses who have unusually high costs;
- anyone with an offshore bank account.
- people involved in tax avoidance schemes;
- Businesses that have unusually high costs.
How can I avoid being prosecuted?
If there are major errors in your tax return there are a range of things you could do to reduce the likelihood of a prosecution.
- Be upfront about irregularities. Tell HMRC before it begins to investigate you.
- Do not falsify documents.
- Tell HMRC about undeclared income or unpaid tax before the sums get too large. Taxpayers whose undeclared income is over £50,000 are much more likely to be prosecuted.
Taxpayers who continue to try to mislead HMRC after it has begun an investigation will receive much stiffer penalties.
The nature of an investigation may change once it is under way. An inquiry into a simple one-off error could be expanded as HMRC sees fit if it suspects underpayment for whatever reason.
In the tax year 2022-23, officials reportedly investigated 248,000 people and businesses, up from 232,000 in the previous tax year. More than 12 million people do a self-assessment each year and there are at least 5 million companies in the UK. Thus the likelihood of being subjected to a random check is low.
Time limits
HMRC has a year to launch a basic inquiry from the date the return was filed as long as it was not overdue. But it can go back four years for non-careless errors or six years for careless or negligent errors and as much as 20 years for deliberate errors.
What are HMRC’s powers?
The UK’s tax gatherer has civil and criminal powers, and in the latter case as regards England and Wales it is the Crown Prosecution Service that decides whether or not to proceed with cases.
Criminal powers
HMRC’s criminal investigation powers are limited to tax-related offences. Where it suspects such an offence it can:
- seek an order requiring information to be produced (a production order);
- apply for and execute search warrants;
- make arrests;
- search suspects and premises after an arrest;
- recover criminal assets through the Proceeds of Crime Act 2002.
It operates throughout the UK, with slightly different powers in each of its three legal jurisdictions; however, thousands of HMRC staff have criminal investigative powers and can summon suspects for interview under caution.
For serious suspected crimes, HMRC can apply for surveillance powers, which include intercepting communications and interference with properties.
Civil powers
These are much more commonly exercised than criminal powers.
Compliance checks
A compliance check can be used to check people’s position relative to the various taxes they might be due to pay. Typically this would be self assessment but it can also be checks on stamp duty payments, VAT and employers’ compliance with the tax code. These checks can be made before a tax return has been submitted.
Self assessment
If HMRC is concerned about something in a self assessment it can open an enquiry. It does not have to say what the enquiry is based on and it can begin with an aspect enquiry – focusing on a part of the return – and expand this to other elements of the return as it sees fit.
An enquiry is concluded with a closure notice, which will either say the return is fine as it is or it will make whatever changes it deems are required.
What if HMRC discovers unpaid tax?
A discovery assessment may be issued if:
- a return has an underassessment of tax;
- an amount of income tax or capital gains tax should have been included but has not;
- an excessive amount of tax relief has been given.
The discovery assessment can only be issued if HMRC has reason to believe:
- the return was filed carelessly or the mistakes were deliberate;
- HMRC could not have been expected to know of the tax errors before the deadline for a notice of enquiry.
The discovery assessment is aimed at creating a legally enforceable debt. Taxpayers have a right of appeal against one.
VAT
A VAT assessment can be issued when HMRC believes VAT has been underpaid or no VAT return has been submitted. An officer of the company can be held liable for non or underpayment where HMRC deems the liability to arise from neglect or fraud.
Can HMRC find out about overseas bank accounts?
Yes. This will often be because the bank asks for a national insurance number and undertakes other know your customer processes when the account is opened. Accountants have reported instances of the taxman detecting overseas income even when that income has not been remitted to the UK.
Document production
HMRC can require taxpayers to give it documents that are reasonably required for it to check their tax position. Furthermore, it can require a third party to give up information about someone else.
Can HMRC look into my bank account?
The taxman has the power (known as a financial institution notice (FIN)) to make financial institutions give it information or documents enabling it to check someone’s tax position or collect a tax debt. There is no right of appeal against a FIN and HMRC does not have to seek approval from the tax tribunal or the taxpayer before issuing a FIN.
However, there are safeguards against indiscriminate use of FINs. The government gives these as:
- The information has to be reasonably required for the purpose of checking a company or individual’s tax position.
- Where the request for information is international, HMRC must have exhausted all reasonable domestic ways of obtaining it.
- Documents covered by legal professional privilege cannot be accessed.
- HMRC must explain why it needs the information unless a tax tribunal rules this condition does not apply.
- Only HMRC staff authorised to issue FINs may do so.
Can HMRC find out about my online trading or holiday let?
Yes. New rules were introduced in January 2024. See accompanying article about individuals and HMRC.
Can individuals be liable for a company’s unpaid taxes?
In some circumstances an individual can be made jointly and severally liable for tax where a company is subject to an insolvency or potential insolvency process.
In addition, HMRC can make officers of a company liable for a failure to pay national insurance contributions when it thinks the non-payment was due to fraud or neglect.
HMRC civil investigations code of practice
Civil investigations are governed by HMRC’s Code of Practice 9. In this case an individual and HMRC agree a contract (known as a CDF) whereby taxpayers give a full, honest and accurate account of irregularities in information submitted, which includes admitting the deliberate avoidance of paying tax, duty or other payments to HMRC. In return they will not face criminal prosecution unless HMRC believes the disclosure was incomplete or it detects continuing activity that it regards as potentially fraudulent.
Agreeing a CDF does not mean a taxpayer will not be investigated by other law enforcement agencies.
There is a right of appeal against the assessment of tax owed or the size of any penalty.
The CDF is not used in cases of careless or genuine error.
Criminal investigations
HMRC will consider opening a criminal investigation in cases where:
- organised criminal gangs are operating or it suspects systematic fraud;
- an individual holds a position of trust and responsibility;
- material false statements or documents are provided to it in a civil investigation;
- it suspects deception relating to a tax avoidance scheme;
- it suspects deliberate concealment, deception, conspiracy or corruption;
- there may be use of false documents;
- it suspects money laundering.
This is not an exhaustive list.
Landlords and HMRC
The Data Protection and Digital Information Bill is soon likely to become law (as of April 2024). It will oblige banks and building societies to monitor the bank accounts of people on means-tested benefits and share the information with the Department for Work and Pensions.
The monitoring extends to bank accounts linked to such claimants, which potentially could include those of landlords. Since the bill is not yet law no one knows how this will play out in practice but it is important for those who do have a financial link to a person on benefits to be aware of the incoming change.
Powers granted under the legislation, if passed, are expected to come into force in 2025 and all banks are intended to come under its scope by 2030.
Renters Reform Bill
The Renters Reform Bill, which as of May 2024 has reached the House of Lords, makes provision for a private rented sector database. If and when this bill becomes law people who are or who intend to be private rented landlords must register both themselves and the dwellings that they let out on the database.
The future is digital
HMRC’s increasing use of artificial intelligence, its supercomputer, Connect, and the incoming policy of making those doing self assessments digitise their records, known as Making Tax Digital, are all making non-compliance easier to detect.(For those who want to know more, this area is covered in a separate article.)
And, if Labour wins the next general election, the shadow chancellor, Rachel Reeves, is intending to collect billions more in tax without raising thresholds by means of more efficient tax raising.
Given the increasing likelihood of errors being picked up, anyone who thinks they may have irregularities in their tax affairs should speak to a qualified adviser who can help them to submit a compliant return.
If you think you maybe at risk of an HMRC investigation or are unsure if your tax return is correct, please contact the friendly team at Finsbury Robinson on 020 8858 4303 or email us at info@finsburyrobinson.co.uk
