HMRC Tax Investigations

HMRC raises over £30 billion from its compliance activity through investigations/enquiries each year. This is likely to increase especially following the huge deficit in the Treasury after Covid.

If you’re being investigated by HMRC, or you’re worried about a potential investigation in the future, don’t worry – we’re here to help. In this article, we’ll discuss everything you need to know in order to deal with an HMRC investigation.

HMRC investigations can be daunting and stressful, but here are some things to bear in mind to reduce the stress:

Be cooperative – but be careful not to make things worse

When you’re dealing with HMRC, it’s important to be cooperative. However, you also need to be careful not to let HMRC trip you up. Remember that anything you say to HMRC can be used against you.

Get professional help

If you’re being investigated by HMRC, it’s a good idea to get professional help. A qualified accountant or tax advisor can help you understand your rights and protect your interests.

Don’t ignore letters from HMRC

If you receive a letter from HMRC, it’s important to take it seriously and respond promptly. Ignoring letters from HMRC can lead to penalties and other problems down the road.

Why are HMRC likely to open an investigation?

If you are being investigated by HMRC, there are several reasons why this may be the case. These can include;

Someone has reported you. These are taken with a pinch of salt by HMRC as often it’s a disgruntled ex employee or ex partner who holds a personal grudge.
HMRC noticing that your returns show losses for several years.
Your returns containing mistakes on a regular basis.
Regularly filing tax returns late or paying tax late
Large fluctuations in your reported figures, for example big drops or jumps in sales or certain expenses
Your figures don’t align with others in your industry.
You are earning considerably less than your employees.
HMRC might be looking at someone else you’re linked to and this raises concerns about you.
Mortgage lenders, banks or letting agents tip off or report to HMRC because they are required to due to suspicious activity.
HMRC have information to suspect that you have not declared all of your income.
Not having an accountant – Having an accountant gives HMRC ‘first line of defence’. If you don’t have an accountant, HMRC considers that there is a higher risk of errors with your return.
Random enquiry – not many but HMRC do carry out random checks.

What are the different types of HMRC Investigations?

If you’re being investigated, HMRC can undertake different types of enquiries. There are many different types and levels but mostly they fall into two types of category.

Full Enquiry

This is a full on investigation when HMRC considers there are several risks and probability of errors with your tax return. If you’re subject to a full enquiry, HMRC will want to look at all your business records and those of directors too if you have a company.

Aspect Enquiry

This is when there are specific risks identified into certain aspects or figures in your return. The enquiry will focus on those elements only. However, if further risks are identified, this might then extend into a full enquiry.

What can HMRC check?

When you’re being investigated by HMRC, it is important that you know they are limited by the number of records they can check. To begin this process HMRC will start the investigation by contacting you first or your accountant in advance. In doing so they’ll set out the evidence and information they require. This can include;

Information on the taxes you’ve paid (remember that isn’t just limited to income tax or corporation tax).
Your books, and details of the tax calculations you’ve made.
Annual accounts, if the investigation is into a limited company.
Your self-assessment returns, if the investigation is into a sole trader. In addition, HMRC may wish to see self-assessment returns of company directors, if the investigation is into a limited company.
PAYE records, where applicable.

What happens during an HMRC visit?

HMRC follow operational procedures and working instructions when undergoing an investigation. Your accountant can provide you with any information on the processes HMRC follow.

When you are being investigated by HMRC, they will usually ask to visit you at your business premises, home or accountant’s office. You are not legally required to meet with them, but doing so will show that you are cooperating with HMRC. You can have an advisor present to help you during the meeting.

HMRC will usually tell you what the visit is about beforehand, or you’ll be given a written copy of the agenda. During the visit, it’s important to answer every question to the best of your ability and be as accurate as possible to avoid any confusion.

How far back can HMRC Investigate?

HMRC is limited in how far back it can check a taxpayer’s returns. In most cases, it can check back as far as four years for any money that is owed. However, this can be extended to six years where HMRC suspects careless behaviour. In the event, HMRC suspects deliberate cases of evasion, HMRC can go back twenty years.

What happens after an HMRC investigation?

After HMRC completes its investigation, they will write to you to explain the outcome.

If HMRC finds something wrong in your returns but does not believe that it was done fraudulently or negligently, they will make the assessments and statutory interest will be charged. They may not charge a penalty or they may agree to suspend a penalty if the behaviour was not deliberate. If a penalty is suspended, HMRC will agree suspension conditions and will usually monitor your tax compliance for typically two years.

If HMRC believes that you have acted negligently or fraudulently, you will be penalised with additional taxes, interest and penalties, which could go as far back as 20 years. You will normally be required to sign a ‘settlement contract’ agreeing to pay the amount within 30 days. HMRC can agree longer time to pay (up to 3 years) in instalments if you can show you do not have the means to pay the amount in one lump sum.

Can I get tax Investigation insurance?

Tax investigations are not only stressful – they can also be expensive. Aside from a potential extra tax bill plus penalties, investigations are not just time-consuming but professional tax advisor fees can rack up.

To protect against the cost of the lost time, you may be able to take out tax investigation insurance. Your business insurance provider may provide this. Or if you are member of The Federation of Small Businesses, this includes free cover for investigations. The cost of insurance is definitely worth it if you ever find yourself in the unfortunate position of an investigation.

If you have an insurance in place, we can work with your insurance provider to represent you.

Our founder Mohammed Nazam worked in HMRC for 20 years before starting his private practice to help individuals and businesses provide a line of defence against potentially aggressive HMRC investigations.

Contact Lexicon Tax to arrange a free discreet and confidential consultation to see how we can help shoulder some of the stress of a HMRC investigation and make sure you don’t pay more than you have to.