Why do HMRC start a Compliance Check?
HMRC have the right to check whether a tax return is accurate and complete, but there are strict time-limits. Certain things may prompt HMRC to start a compliance check into your tax affairs. For example, if you:
- enter figures on a tax return that seem to be wrong
- make a claim for a large VAT refund when your turnover is low
- declare a small amount of tax when your turnover is high
- seem to be in business for a long time but it makes no profits
- personal expenditure is claimed in the P&L account
HMRC will usually write to you to tell you what they want to check (and why sometimes). They will also write to your regular, authorised tax agent if you have one.
Every year, thousands of individual’s, partnership’s, trustees’ and corporate’s tax returns undergo a HMRC Compliance Check. This is to ensure that the correct amounts of tax are being paid and that the correct levels of allowances and reliefs are being claimed for example.
What Happens in an HMRC Compliance (Enquiry)?
Before HMRC can make any enquiries, it must send you, your partnership or the officeholder(s) of the corporate a written Notice of enquiry. HMRC refers to this as “opening an enquiry” or commencing an “HMRC Compliance Check” – used interchangeable. At the same time, HMRC will also request documents and information relevant to the entries on the tax return in question, to check the tax risks they have identified or find them, and understand the figures better. These requests must be relevant to the entries on the tax return and the point(s) which HMRC are querying.
Normally, you are given 30 days to provide the paperwork. We strongly suggest that you or your client contacts a tax investigations specialist to ensure that you do not give HMRC information they are not entitled to, i.e. don’t over share. By doing so, you could potentially open yourself/the partnership or corporate up to further, often unnecessary scrutiny, which usually gives rise to further questions and checks, which then increases a person’s costs. An HMRC Compliance Check is considered to be routine in practice, because they can close quite quickly too.
Failure to provide adequate information and supporting documentation within the 30 days could give rise to penalties and/or more aggressive action from HMRC. It is therefore important to ensure a timely and well-considered response. Specialists can help ensure that you comply with HMRC’s requirements whilst protecting your interests by focusing HMRC’s attention to risks only and so narrowing the scope of the HMRC Compliance Check.
HMRC can only make one enquiry into a tax return. However, if the return is amended for any reason then HMRC can also enquire into that amendment. If HMRC enquires into a partnership or corporate tax return and then wants to ask an associated individual taxpayer (be that a director, shareholder, partner etc) questions about their personal tax position, they must open a separate enquiry/HMRC compliance check into them, if they are able to.
With the opening of any HMRC Compliance Check, there are strict time limits in place for doing so and it is important to speak to a specialist to ensure that any enquiry notice you may have received is genuine and valid before proceeding.
A HMRC compliance check often covers multiple taxes, in which case specialist HMRC staff sometimes work together to review, for example, any VAT or PAYE matters.
What else should I know about HMRC Compliance Checks?
HMRC requesting information and records
HMRC will ask for information and records to test the tax risks they have identified as part of their tax assessment which led to the compliance check commencing. This is usually done on a voluntary / informal basis at first. HMRC are developing their risk assessment too.
They may issue you or your client with a formal ‘Information Notice‘ too. HMRC do this when co-operation and/or information provision is believed not to be forthcoming. If you receive an HMRC information notice you are legally required to provide the documents/information requested therein, within the time specified, otherwise penalties can apply for failure to comply with that notice.
See HMRC’s webpage on HMRC compliance checks, including short videos: HMRC compliance checks: help and support – GOV.UK
While Information Notices are usually issued as part of a HMRC compliance check where they are deemed necessary, sometimes the powers can be used without a valid, open self-assessment enquiry. An experienced tax investigations specialist would be able to assist in evaluating whether such an information notice is valid, overly onerous for you, or capable of being appealed. HMRC must follow strict rules to be able to use these formal information powers.
HMRC visiting premises
As part of an HMRC compliance check, they could use their powers to visit your premises or home office, either on a pre-arranged or an unannounced basis. The do the latter when they believe that giving you prior warning may affect which records are made available to them. They do this to inspect the business premises, operations, assets, and the financial records. If you work from or have an office at home, this can include your personal property too.
What can you do in these circumstances?
There are opportunities to extend the deadline for replying to HMRC if you have a reasonable excuse for not complying sooner, and amending the wording of an information notice therefore its scope. You must inform HMRC as quickly as possible if this is appropriate. If you consider that you or your client, may have a reasonable excuse as to why you cannot comply, or you believe that the information request is unreasonable or irrelevant, then seek specialist tax advice from some that has significant experience of HMRC enquiries management.
The same applies to HMRC requests to visit business premises. HMRC usually contact you in advance to agree arrangements for the visit and reviewing business records. You must act quickly if there is a valid reason for delaying the visit or disagreeing with it, else you may appear to be acting unreasonably.
HMRC’s acceptable parameters for delays and appeals are narrow and so specialist tax advice can be invaluable.
What are the outcomes of a compliance check?
As in many cases, if the compliance check shows that there is nothing wrong in the tax return, HMRC will conclude it by issuing a Closure Notice. That is why its important to co-operate with HMRC and be helpful, to make progress quickly.
If you are found to have underpaid tax, you will need to repay this. HMRC will charge you interest for paying any tax due late, and HMRC may also charge you a penalty depending on the reason for the error(s) resulting in underpaid tax. Calculating penalties due for failing to notify HMRC that income or gains were reportable or where tax returns were incorrect, can be complicated. You need to consider why the error arose, what you did or did not do, how much you co-operated with HMRC and how helpful you were in providing relevant documentation and information.
HMRC may issue a Closure Notice or in some circumstances issue a tax assessment, with amended figures, to bring any additional tax payable into charge. Alternatively, HMRC may agree to settle the enquiry through a Contract Settlement, where several years involved and/or penalties are being collected together too.
What should you do if you receive an HMRC Compliance Check / enquiry letter?
HMRC rarely carry out random enquiries. They target perceived tax ‘risks’ in the person’s or entity’s tax position. So if HMRC have contacted you or your client, it is likely they have a specific risk area(s) in mind which they would like to know more about, to develop and test that risk assessment.
Getting tax investigation specialists involved from the outset can help narrow down an HMRC compliance check’s scope. This will ensure that the matter is resolved more promptly and as efficiently as possible, because less time and money is spent on immaterial matters. This allows the person to continue with their normal life sooner.
If an HMRC compliance check is opened into your personal or business tax/VAT affairs then you should consider the following points soon:
- Do you feel uncomfortable dealing with HMRC on your own? Or, as an adviser, do you feel your client could use specialist assistance and more quickly?
- Do you feel like your knowledge of HMRC’s latest enquiry and information powers is not up-to-date?
- Does HMRC’s approach or any requests for information and documents seem unreasonable and/or onerous?
- Are you concerned that an existing, straightforward compliance check is now escalating out of control and developing into an in-depth and intrusive investigation?
- Do you feel like you are unable to properly manage and control HMRC, therefore the enquiry’s scope has widening?
- Are there any errors in your tax/VAT affairs? If so, these issues need to be managed and carefully disclosed, so as to mitigate any potential penalties.
- Do you want to avoid your details being published as a deliberate tax defaulter on HMRC’s website (whereby your name, address and details of the tax irregularity’s quantum are published and can be searched online)?
- Do you qualify for one of HMRC’s Campaigns, designed to encourage the disclosure of tax/VAT errors? If so, a streamlined approach is available, and a more beneficial penalty outcome can be secured early on.
If the answer to any of the above is “yes” or “I don’t know” get in touch as soon as possible and we can help.
HOW CAN PURE TAX INVESTIGATIONS HELP?
At Pure Tax our Tax Investigation & Disclosure specialists are industry recognised and have dealt with hundreds of contentious situations with HMRC over the years. We are adept at managing interactions with the tax authorities to ensure that the investigation and disclosure processes run smoothly and that your interests are best protected.
