Overview

 HMRC undertake compliance checks into individuals, sole traders, companies and partnerships.  HMRC are provided with a vast array of information and use this to risk assess Tax Returns.  Where HMRC hold information that suggests that income has been omitted or expenditure has been overstated, they may open a compliance check into the Tax Return.

HMRC will write to the taxpayer and inform them of the compliance check and will request information and documentation to look into their concerns.

Many of the compliance checks into businesses will involve a visit to the business premises to conduct a review of the records and to ask questions arising from the review to the director/partner/proprietor of the business.  Usually, these visits will be made by appointment, but in exceptional circumstances HMRC can arrive without giving the taxpayer any notice.

Most tax investigations carried out by HMRC are into tax returns submitted by individuals without appointing tax advisors.

Some of these investigations will be cases where HMRC suspects that some income such as interest, dividends, rental income or capital gains, have been omitted or understated on the tax return.

Many of the cases will be into the tax returns of people who are self-employed.  In these cases, HMRC believe that the taxpayer has a greater opportunity to understate the taxable profits earned by the business operated by the taxpayer.  This could be through either understating or omitting their income or overstating their expenses.

Tax investigations into self-employed, partnerships, limited company, PAYE or VAT are often divided into two categories: “aspect” enquiries and “full” enquiries.  Broadly speaking, the “aspect” enquiries are cases where HMRC is asking about particular entries on the self-employed, partnerships, limited company or VAT tax return.  On the other hand, “full” enquiries look at every aspect of the tax return.

Aspect enquiries are usually more straightforward to deal with, because HMRC are only interested in a limited area of the tax return or accounts.

When HMRC open a full tax investigation into a self-employed, partnerships, limited company tax return they will usually ask to see all the books and business records for the self-employed, partnerships, limited company, PAYE or VAT.  This will include any financial accounts prepared, either by self-employed, partnerships, limited company director or their accountant.  HMRC will examine these records in detail to see if all the income and expenses have been correctly reported and claimed.

HMRC will usually want to meet with the self-employed, partnerships, limited company director face-to-face so that they can get an understanding of the way in which the self-employed, partnerships, limited company director operates.  BMC recommends that self-employed, partnerships, limited company director do not attend a meeting with HMRC unrepresented, and that ideally the meeting should take place without the self-employed, partnerships, limited company director being present.  

It is very easy to make an error in dealing with a tax investigation which has detrimental consequences for the client, even in cases where there is nothing wrong with their tax affairs. For example, if unlimited information is provided to HMRC, they will almost invariably find questions to ask about the data provided.  Before providing any information or documentation to HMRC it is always better to ascertain exactly what information HMRC are entitled to receive, and then present this in such a way that it helps to bring the tax investigation to a close rather than opening up new aspects for HMRC to explore.

Different Types of Investigation

HMRC carry out a range of different types of tax investigations.  All of these investigations are officially called “enquiries” but they range from simple requests for clarification to criminal prosecutions.

The investigation can look at the tax affairs of different types of taxpayers – for example companies, individuals, businesses, partnerships or trusts.

The whole range of taxes can be reviewed – for example income tax, capital gains tax, inheritance tax, corporation tax or VAT.

HMRC can also look into a business’s role as an employer by examining how it operates PAYE on the pay and benefits it gives to its employees (including a company’s directors).

Different Levels of Investigation

Some tax investigations, whether personal tax investigations or company tax investigations can be minor and straightforward; these can often be settled by an exchange of letters between HMRC and the taxpayer’s advisor or agent.

Most cases involve much more.  HMRC will want to examine business and personal records in order to check that all profits and gains have been declared and taxed correctly.  Usually, HMRC will want to interview the taxpayer, or visit the business premises.  Not only can this kind of investigation take a long time to resolve, it can also seem very intrusive.

Where HMRC suspect tax avoidance, these cases are dealt with under a special procedure set out in Code of Practice 8.

Where HMRC suspect tax fraud or tax evasion these cases are either dealt with under a special procedure set out in Code of Practice 9, though in the most serious cases HMRC will conduct the investigation with a view to seeking a criminal prosecution for the offenders.

Cases which start off at one level can be escalated to a higher level if further information comes to the attention of HMRC during the course of the investigation or if the investigation has been mishandled by the taxpayer’s advisor.  This is why it is recommended that taxpayers seek specialist tax investigations advice from the outset of any HMRC enquiry.

Cases Using Civil Procedures

The vast majority of HMRC tax investigations are carried out using civil procedures.  This means that HMRC will be trying to reach a financial settlement which will typically include the underpaid tax, interest on the underpaid tax and a financial penalty.

Cases Using Criminal Procedures

These cases are comparatively rare, but where HMRC does choose to prosecute a taxpayer through the criminal courts, they will be looking to recover the tax and interest as in a civil case but instead of looking for a financial penalty they will be seeking a prison sentence.

How Can BMC Help?

Legislation imposes restrictions on what HMRC is allowed to do, and BMC will make sure that the Tax Inspector carrying out the enquiry does not exceed the powers they are given by law.

BMC is a specialist tax investigation practice.  Our team is experienced at dealing with tax investigations carried out by HMRC’s Fraud Investigation Service teams.

We will consider the level of seriousness of the tax investigation being carried out by HMRC by looking at who is leading the investigation and the nature of the questions they are asking.

We will give you the best advice on how to deal with HMRC so that you achieve a settlement as quickly as possible whilst minimising your tax exposure.  We will ensure that the investigation is handled professionally, so it is not escalated to a higher level and you will avoid being named and shamed.  If you need to pay more tax, we will present your case in the best light possible to minimise your liabilities.  If you are unable to pay the tax in one lump sum, we will negotiate a time to pay arrangement with HMRC on your behalf.

As far as possible we will take the pressure off you during the investigation by negotiating with HMRC on your behalf.  We will keep you informed throughout, and the final decision as to whether or not to accept the negotiated proposals will always be yours.

We will defend your interests in order to minimise the effects of the investigation, not only in terms of the costs in tax and associated penalties but also in terms of the professional fees incurred.  We will also shield you, as far as possible, from the stresses and strains involved in being the subject of a thorough investigation by HMRC’s best investigators.

BMC will negotiate any additional tax which may be due, and will put forward arguments to minimise your tax liability and the penalty charged

Almost all VAT & PAYE investigations will involve a visit to the business premises to conduct a review of the records and to ask questions arising from the review.  Usually, these visits will be made by appointment, but in exceptional circumstances HMRC can arrive without giving the taxpayer any notice.

HMRC will usually tell the taxpayer in advance which records they want to examine, which can include the records for the current year as well as for years for which PAYE or VAT returns have already been submitted.

If HMRC have opened an enquiry into your tax affairs, or the tax affairs of your business, then please contact us for a free, confidential and no obligation discussion.  We are happy to have an initial free of charge meeting with prospective clients.