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If you have received a tax investigation letter from HMRC what should you do?

“In the first instance, you should always read the letter carefully and if you are unsure what it means, or if it is a complicated request for information it is a good idea to get expert, specialist advice straight away. Any investigation into your tax affairs is very likely to be disruptive to your business and costly, especially if you don’t get the right help. We would caution against replying without seeking advice, however tempting it may be.”

At AMC our expert team will be able to support you in all of HMRC’s investigatory areas.

For a free, confidential chat about any HMRC enquiry, or tax investigation contact our AMC Accountancy specialist tax team without delay.

What triggers an Investigation?

“Compliance checks are usually triggered when figures submitted on a return appear to be wrong for some reason. For example, when a business with a large turnover declares a very small amount of tax, or on the other end of the scale, if a small company suddenly makes a large claim for VAT. However, there are many other reasons why a business can become under investigation:

  • HMRC receives a tip-off;
  • Your income falls dramatically, costs increase significantly or there are inconsistencies between different returns;
  • Your costs are unusually high compared to the industry norm;
  • Your business is in a high-risk industry, for example one that commonly takes cash payments;
  • You often file your returns late;
  • Your standard of living appears to be inconsistent with your declared level of income; or
  • You are unlucky enough to be in a sector that HMRC has decided to target.

Which business taxes do HMRC investigate?

HMRC investigations are not limited to income tax and can also include

  • Corporation Tax
  • VAT
  • Capital Gains Tax
  • Inheritance tax
  • National Insurance
  • Stamp Duty Land Tax
  • PAYE and Construction Industry Scheme deductions

Main types of HMRC investigation

  • A Full Enquiry

“This may occur when HMRC believes there is a significant risk of error in a tax return and a review of all records will be undertaken. This can include personal financial records of Directors/Business owners as well as business records, and in such circumstances, it is important to receive professional guidance as to what HMRC can legitimately request.”

  • An Aspect Enquiry

“In this instance HMRC wants more information about a particular part (or parts) of a return or the accounts on which it is based. Although this is often due to a genuine mistake rather than a deliberate attempt to evade tax, it is still important that you don’t take this type of enquiry lightly and treat it just as seriously as a full enquiry.”

  • Random Enquiry?

“HMRC maintain that they select cases for enquiry purely at random. Whilst this may be factually correct, HMRC has at its disposal comprehensive information sources and sophisticated statistical analysis techniques to scrutinise financial information included in submitted returns. So, although HMRC may occasionally pick a selection of businesses to investigate completely at random, you should never assume this applies to you. Any enquiry should be taken seriously.”

How far back can HMRC go?

“This is a complex question. The usual answer for self-assessment returns is one year from the date of filing, although HMRC can use their powers of “discovery” to raise assessments for earlier periods or request information if they have grounds for suspecting an underpayment of tax. Their entitlement to do this should always be examined carefully so that you should always seek professional advice if you are asked for information or receive an assessment in relation to a year that is supposedly “closed”. Where returns are inaccurate through carelessness, generally HMRC has 6 years to raise assessments.”

“If HMRC writes to you stating that they are doing so under “Code of Practice 9” they can go back up to 20 years. These cases are very serious because they involve HMRC alleging deliberate taxpayer behavior involving fraud. If you receive a code of practice 9 notice you should get specialist help immediately. AMC Accountants has extensive experience in this complex area.”

What happens once HMRC have decided to investigate?

“Once HMRC have decided to conduct a tax investigation, you will be required to provide any information they have requested, unless you can demonstrate that the information is not “reasonably required” for the purposes of the enquiry. In many cases the anomaly will have been caused by a minor discrepancy and the case can be closed relatively quickly. Occasionally however, HMRC may request further information and wish to undertake a more detailed investigation.”

“What happens next will depend on what HMRC finds. They may prosecute in cases of deliberate or fraudulent tax evasion, particularly in cases where large amounts of tax are at stake. Indeed, it is possible to go to prison for tax offences although HMRC will usually seek civil penalties. In fact, the code of practice 9 procedure mentioned above is specifically aimed at giving taxpayers protection from prosecution subject to their making a full disclosure of past irregularities and agreeing to make good the tax.”

Some of the most common outcomes and solutions include:

  • Underpaid tax

“You will be required to pay any tax owed within 30 days, with interest added. You may also be charged a penalty unless HMRC determine that the error was made despite taking reasonable care. If an underpayment arose because of a careless error, penalties can often be suspended (and not paid at all) if HMRC can agree specific suspension conditions and these are adhered to by the taxpayer for a prescribed period of time. HMRC likes to insist that there are no appropriate suspension conditions in particular circumstances, but often they can be persuaded otherwise.”

  • Overpaid tax

You will receive a tax rebate with interest.

  • Penalties Not Suspended

“If HMRC conclude there was deliberate behavior on the part of the taxpayer, they will charge a penalty based on the underpaid tax may escalate the case to criminal status. If this happens, the amount of any penalty will depend on such factors as why you underpaid, the seriousness of the matter and the amount of the liability involved, how quickly you told HMRC about any mistakes, whether this was prompted by HMRC or volunteered by you and your level of co-operation throughout the enquiry. Similar factors apply where a penalty is levied for careless behavior in circumstances where HMRC cannot agree suspension conditions (see above).”

How long will a tax investigation take?

Some tax investigations finish with one letter, other investigations can go on for months or even years, with HMRC asking for more and more information.

How do I know that the investigation is over?

This will be officially marked by either a closure notice being issued, or by agreeing a contract settlement.

  • Closure notices can include a penalty notice or an assessment and are usually received in the form of a letter detailing exactly what the final position is.
  • contract settlement is a legally binding agreement between HMRC and the taxpayer. The taxpayer agrees to pay the money and HMRC agrees not to use its powers to recover the money.

The good news is that once a return has been investigated, it cannot usually be investigated again.

“Once a closure notice has been issued, if you do not agree with HMRC’s findings you can usually appeal HMRC’s decision to the Tribunal. However, this is a costly process and not one to be undertaken lightly.”

Need Advice?

“At AMC we offer a comprehensive range of tax investigations services for those facing an HMRC enquiry. If you have any questions or would benefit from impartial, confidential advice, please get in touch with our experienced tax investigation team today.”

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