It’s the letter every taxpayer dreads – a notice from HMRC that your business or personal affairs are under investigation. We shed some light on this rather painful process to ensure that you are aware of your rights and obligations.
There have been substantial changes to tax investigations in recent years, from a new penalty regime to increased information powers and a revamped Code of Practice for cases of suspected fraud. Plus in addition to random enquiries, HMRC in recent years has also focused on a series of “Campaigns” and “Task Forces” to target specific trades and professions in order to raise additional funds. And raise additional funds tax investigations do, regularly producing in excess of £10billion for the Treasury each year. If you factor in the news that the tax authorities have been given millions by the Government to crack down on compliance, it’s clear that your chances of being investigated are significantly higher than they were several years ago.
Compliance check… or formal enquiry?
Under the self assessment regime you are responsible for submitting your tax return to HMRC by 31st Jan latest, disclosing details of all your income, from the profits of your self-employed business to investments, trusts and child benefit. HMRC then have a finite period of time in which to investigate – or to use a softer term they prefer “make enquiries into” – your affairs. The Finance Act 2008 Sch 36 consolidated HMRC’s existing powers and introduced new ones on what have now become known as “compliance checks”.
The consensus generally is that the new rules allow HMRC informally to ask numerous questions about the taxpayer’s general tax position where HMRCs do not feel a formal enquiry is required. In some instances this is welcome, for example, a telephone call to the agent to clarify an apparently obvious transposition error or missing bank interest does not warrant the red tape of an enquiry. Schedule 36 is, therefore, perceived as a substitute for an enquiry allowing HMRC to ask for anything that the schedule permits.
Investigations are however a different matter. HMRC must open a formal enquiry before asking for more information about your self assessment tax return, and will therefore write to you to inform you of this, demanding the presentation of certain documents to be delivered by a specific date. For an enquiry to be valid, notice of enquiry must be given in writing. The date of the enquiry letter is important but, to be valid, the date of receipt is key – it must be received by the taxpayer before the enquiry window closes which is one year following the date the return has to be submitted to HMRC. The 2016/17 SA return has to be submitted by 31st January 2018 and HMRC have to open an enquiry into that return by 31st January 2019. Outside of this timeframe, the enquiry has no legal basis unless it is part of a wider investigation.
Random or deliberate?
There is some speculation as to whether taxpayers are simply chosen for enquiry at random. In the early days of self assessment, the reality was that few cases were random and HMRC had usually identified what they perceived as a risk of the declared tax position being incorrect. Indeed, HMRC’s Compliance Handbook at CH23560 states: “Reason to suspect does not allow you to make speculative enquiries, seeking information merely in the hope that something relevant will crop up. You must be able to identify specific risks.” However, with the increased powers now available to them, HMRC are able to investigate at random, and frequently do.
Understanding the claims
In theory, at the outset of an enquiry, HMRC should state the specific concerns identified in the case in question and focus on resolving them – rather than generalising and leaving the client and the agent in the dark. In practice, enquiry letters tend to be rather vague, and do not set out the reasons for an investigation. The main reason for this is that the initial enquiry gives the taxpayer the opportunity to disclose any irregularities himself, and in doing so achieve a significant reduction in any penalty found to be due and avoid other unwelcome consequences, for example insolvency and the publication of your name. Hence you will often hear the term “disclosure” in tax investigation matters.
When it comes to documentation, HMRC have acquired sweeping powers to investigate all aspects of your business and personal life. HMRC can request access to all business records, including bank statements, accounts books, receipts for expenditure and income invoices, paying-in books and cheque books of all business bank accounts and may also ask for non-financial records such as diaries and copies of emails. In this regard, ignore the six year legal business records retention rule at your peril! However, the HMRC may also ask to see personal records of private bank & building society accounts, dividend receipts and transactions involving the sale or purchase of any items. In this respect, HMRC already have access to your financial information and want to check what you are submitting with what they already know. Whilst there is no such similar legal requirement to keep personal records, as a self-employed taxpayer, you would do well to remember that HMRC will regard you as ‘guilty unless you can prove yourself otherwise’ – so do keep any documentation which relates to your self assessment return. The taxman may also request information from spouses or partners; although they have no powers at law to do so, if you decline and errors are subsequently found in your submission, then the taxman is likely to be less favourable in penalty determination.
What happens next?
Once the HMRC has reviewed the documentation, you are likely to be called to a meeting or interview, during which a written record will be taken. This statement will then be sent to you and your accountant for your approval. If you spot any errors or inconsistencies, do not sign but instead challenge them in writing, as once signed, the minutes become the ‘true’ history of the meeting, regardless of the reality. If there has been some under-declaration – or if you sadly cannot disprove the taxman’s claims with documentary evidence – then our advice is to start making payments on account as soon as possible to avoid interest charges, even if you intend to appeal. HMRC have the right to apply interest charges and penalties on the unpaid amounts, and will undoubtedly do so but you may in certain circumstances be able to negotiate a payment plan if this leaves you in financial hardship.
Protecting your good name
Confidentiality is a concern for many who find themselves under investigation, with the fear of reputational loss whether the investigations unearths issues or not. HMRC however have a duty of care and generally do not disclose information to third parties without your consent. Complications however occur when evidence is required from third parties to corroborate your situation – for example, confirmation of cash gifts from family members.
Seek professional advice
Tax investigations can be time-consuming and extremely stressful and much management time can be taken in sifting through information and corresponding with the tax office (not to mention the sleepless nights).
Engaging your accountant to manage the process on your behalf may well be money well spent, providing you with someone who speaks the taxman’s language and who can offer you full professional representation. For further information, contact the office.