Everything You Need to Know About A HMRC Tax Investigation
Her Majesty’s Revenue and Customs (HMRC) is the government department that is responsible for collecting taxes. HMRC have the power to the investigate tax affairs of individuals and businesses to ensure they are paying the right taxes, and the correct amounts.
If you are worried about a HMRC tax investigation, we’ve put together some information below to help you understand the reasons an investigation might be opened and what to expect during a HMRC tax investigation.
How Will I Know If I Am Being Investigated By HMRC?
You will not be notified by HMRC as soon as it is looking into your affairs. However, if HMRC decide to formally investigate you, you will receive an official letter from one of its departments notifying you of their interest in you / the business, and asking for more information. In this letter, HMRC should set out what specific aspect of the tax return or tax affairs they want to investigate.
This usually starts on a limited scope asking for more information about your latest tax return, or a request for information about a particular issue / transaction, such as a property sale. However, it is not uncommon for the scope of these investigations to be extended should other issues come to HMRC’s attention.If HMRC thinks that criminal activity has occurred, such as VAT fraud or serious / extensive tax evasion, then it may open a criminal investigation.
When you receive an investigation letter from the HMRC, here’s what you should do:
- Before responding, you should:
- Ask your accountant for their professional opinion on why you are being investigated.
- Instruct a specialist tax investigation accountant who has experience in dealing with HMRC investigations – a tax investigation accountant can explain your rights and ensure HMRC don’t overreach themselves / abuse their powers, and achieve the best resolution possible by presenting your side in a clear manner and negotiate the best settlement, on the most favourable terms, where necessary.
- Be prepared to gather the information requested and respond to HMRC; you need to deal with this and should not ignore the investigation letter as they will not go away. Non-cooperation will prejudice your opportunity to resolve the situation early on, and if additional tax is due from getting the best settlement possible.
Reasons I Am Under Investigation
Being under investigation does not always mean you did something wrong. There are many reasons behind why HMRC might start an investigation, but here are some of the common reasons:
- There are mistakes, omissions or inconsistencies in your paperwork No one is perfect. No matter how careful you are with your filing, there may come a time that you will forget to tick a box, miss a section, or pay less or more tax than required. Or there may be inconsistencies in the information you submitted yourself in different documents to HMRC, or with the information HMRC have from other sources e.g. property transactions, employer’s tax/benefit-in-kind filings, HMRC investigations of other individuals / businesses. HMRC will conduct their investigation to check what has happened and obtain sufficient information for them to understand the situation, so that they can conclude whether or not the correct amount of tax has been assessed/paid. As long as you have the right documents at hand, this issue can be resolved quickly.
- You are part of their target group HMRC often look at specific tax-payer profiles that may potentially be part of high-risk groups. These can be businesses and people that are more prone to tax shortfalls, such as people with multiple sources of income, cash trade businesses, or even target sectors such as fast food takeaways and restaurants, vehicle traders and taxi drivers.
- You might have raised some suspicions For example, if you are seeking a tax repayment, or you often submit your tax return late, or your expenses are higher than your income, these might raise cause for concern indicators against your tax account, and therefore bring you onto HMRC’s enquiry list.
What to Expect During the Investigation
The main objective of a HMRC investigation is to clarify a particular aspect of your tax return that the HMRC finds suspicious, or it doesn’t understand based on the information you originally submitted. If your case is more significant, the HMRC might conduct a full investigation of your tax affairs, where you will be required to submit your entire financial records.
The records include your personal and/or a business’ bank and credit card statements, VAT records, sales invoices and records, payroll record, purchase invoices and expense receipts, job quotes and estimates, savings/pension and property holdings, and more. If these are digitally stored, HMRC may request access to your computer software. If not, they will ask for a copy of your records.
In relation to a self-assessment tax return, HMRC can make a discovery assessment within four years from the tax year in question, and claim unpaid tax with interest plus penalties. If they see that you have been careless with your documentation, they may go back six years. If you are suspected of deliberate tax avoidance, they can check your records for the past 20 years.
Small tax investigations can last from three to six months, whilst a full-scale investigation can take over a year.
Tax Investigation Outcomes
You will be given a calculation of what the HMRC believe you owe them, and depending on the circumstances you / your company may incur a penalty for inaccuracy, plus interest on the tax due. A penalty may be incurred if the inaccuracy was careless, deliberate or deliberate and concealed, and can be as much as 100% of the tax due.
If you are asked to pay, you need to pay the amount immediately - if you are unable to pay the full amount, you may be able to agree a payment plan with the HMRC.
If you do not agree with the outcome, you can enter an Alternative Dispute Resolution (ADR) process for you to set out the reasons why the assessment is incorrect, and for HMRC to explain their position and view on your explanations, and so seek an agreed resolution.
In order to appeal HMRC’s decision you must do so within a set time limit, which will usually be detailed in your decision letter, or you lose your opportunity to challenge HMRC’s tax assessment.
Regardless of whether or not there is anything wrong with your / the business’ tax affairs, being under tax investigation is very stressful, and will take up a lot of your time. You need to be prepared for this and work smartly about it. Hiring an accountant familiar with cases like this can help you go through the process smoothly and reduce the pain.
Do your best always to file your tax papers on time and correctly to avoid the stress and inconvenience, but know that if HMRC come knocking at your door you are not alone, and there is help at hand from specialist tax investigation accountants.
If you have any questions or concerns regarding tax investigations, you can always reach out to us. We have a team of HMRC investigation accountants in Manchester to help you with your needs! Take a look at some of our case studies here.