Tax audits and tax inspections can be complex and extremely stressful, and unless you are sure of your position, you may benefit from professional advice as soon as a tax investigation begins.

Often, your accountant may not be the best person to assist with an HMRC tax investigation. If you would like a second opinion or are generally worried, we are highly experienced in dealing with and negotiating with HMRC so please do get in contact.

Investigations can often lead to unexpectedly large tax bills, subsequent insolvency and can mean a time to pay arrangement being required; company voluntary arrangement or even a creditors’ voluntary liquidation.

We cover the process of a tax investigation, and what to expect.

How do you know if HMRC are investigating you?

Initial investigations are likely prompted by red flags via HMRC’s supercomputer Connect. As such you are unlikely to become aware of any investigation until you receive formal notice via a letter to your business address.

A formal notification should clearly state what’s being looked into and the relevant HMRC department behind the investigation.

What is an HMRC Investigation?

In some cases your company may face an investigation s part of random HMRC Tax investigations but HMRC have the tools to flag up unuisual patterns or other risk flags which suggest to them that something has significantly changed in your business or may suggest some form of wrongdoing

HMRC investigations are targeted at clarifying whether accurate information has been offered, and accurate amounts of tax paid.

Tax inspections occur most frequently in companies registered for VAT and PAYE, the 2 types of tax where errors or fraud are most commonly found

Routine tax audits focusing on income tax or corporation tax are much less likely, unless HMRC has reason to believe you are deliberating concealing income or making errors when filing your returns.

Deliberate concealment or even fraudulent activity can lead to criminal investigations so be aware.

Why are HMRC Investigating My Company?

You are much more likely to be on the receiving end of a tax investigation if:

• You make errors on your tax returns that need correcting.
• You file returns or pay tax late.
• Your expenses are abnormally high for your industry.
• Your tax returns are inconsistent.
• You operate in a high risk industry
• HMRC receives a tip-off

You may choose to take out an insurance policy to cover you against the cost of a tax audit or investigation.

Aspect, full and random investigations

Tax enquiries can be broken down into three categories: aspect, full and random investigations.

Aspect enquiries will focus on one or more areas of your tax information; full enquiries will involve an inspection of the whole of your tax return; while random enquiries are a tool to evaluate tax returns in areas that are deemed to be high risk.

What Happens if you get Investigated by HMRC?

HMRC will write or phone to inform you of the investigation and explain what they’d like to check. A tax investigation will start with a letter asking for information (‘information notice’). In a tax audit, the inspector will usually want to pay you a visit and check your tax records. In the case of a tax investigation, the letter will explain which part of your tax return HMRC wants to check.

This could be:

• Your self assessment tax return
• Your company tax return
• PAYE records and returns
• Your accounts and tax calculations

Tax penalties

You may have to pay a penalty if you fail to respond to a request for information or refuse a visit.

Once a tax investigation has started, it can last several months or more.

It can also expand to cover different areas. For example, what may have started off as an investigation into corporation tax can lead to enquiries into the director’s personal tax affairs. In this instance, the assistance of an expert can be invaluable, as they can shoulder much of the burden and advise you on the best way forward if HMRC is acting unreasonably or demanding too much information.

Once the investigation is complete, if HMRC finds you at fault there may also be some financial penalties to pay. This will include the unpaid tax liability, any interest owing from the date the original payment was due, and a penalty that can be as much as 200 percent of the original liability.

While the costs associated with an HMRC investigation aren’t likely to do too much damage to the balance sheets of big companies, a lengthy tax investigation could spell trouble for a smaller firm. This is particularly the case if there is significant interest and financial penalties to pay.

How far back do HMRC investigate?

  • Innocent errors – 4 years
  • Careless Errors – 6 years
  • Deliberate Tax Evasion – 20 years

What Power and Authority do Investigation Officers have?

Most SMEs only deal with HMRC to file their returns and pay their taxes, but the fact is that random tax investigations can take place. That means you do not necessarily have to do anything wrong to come into contact with an HMRC investigation officer.

If you are the subject of an HMRC investigation, it does pay to know exactly what the investigation officers can and can’t do.

They must tell you what taxes they’re investigating

If the tax office decides to investigate you then it must make it clear what aspect of your taxes it is assessing. HMRC itself says: “We will only review the records relating to the tax, duty or tax credit we have told you we will be looking at. If we intend to review a number of taxes at the same time, we will tell you in advance and give you the opportunity to decline.”

HMRC has extensive powers to obtain information from the taxpayer and third parties. However, if an investigator is reviewing your VAT return, but asks to see your corporation tax records without giving you prior warning, you are within your rights to refuse.

HMRC investigating officers have the power to inspect a business premises.

In recent years, there has been an increase in the number of unannounced visits made by tax inspectors and investigating officers from HMRC, although most visits are pre-announced.

Investigating officers can:

  • Ask to see books and records;
  • Question owners and staff about the business;
  • Interrogate computers;
  • Remove records for examination.

HMRC also has the right to visit third parties, but it will not inspect domestic premises unless they are used by the business and stock or other assets are stored there.

An appeal can be lodged against an inspection notice but there is no right of appeal where the notice has been agreed by the Tax Tribunal. HMRC can also apply penalties for obstruction.

Investigating suspected fraud

If HMRC believes you may have committed, or intended to commit fraud, it can start an investigation under the Code of Practice 9 investigation of fraud procedure.

In recent years, HMRC has significantly changed how it investigates and settles cases of tax fraud by introducing the Contractual Disclosure Facility (CDF). This invites the individual being investigated to disclose completely any intended or unintended attempts to defraud the tax system.

The key features of the CDF include:

  • Taxpayers suspected of fraud are invited to enter into a contract with HMRC to make full disclosure of any fraud;
  • If an individual makes a full disclosure then HMRC will undertake not to pursue a criminal prosecution;
  • Taxpayers have 60 days to disclose any irregularities. This may be followed by a more detailed disclosure in a timescale agreed with the investigating officer;
  • Criminal investigations can be commenced where an incomplete disclosure is made or an individual chooses not to cooperate;

If HMRC investigating offices believe an individual has not properly disclosed sufficient information to account for any tax discrepancies, a criminal investigation can begin which brings a new range of powers.

Criminal investigation powers

At the top end of the spectrum are HMRC’s criminal investigation powers.

The criminal investigation powers can only be used by investigating officers who are authorised to use them. These powers are used against taxpayers who are intent on breaking the law and not paying their taxes. In this case, the investigating officers can:

  • Apply for production orders for information to be produced;
  • Apply for search warrants;
  • Make arrests;
  • Search suspects and their premises after an arrest.

How to Appeal?

If you feel that your tax affairs are being investigated unnecessarily, or unfairly, it is within your right to appeal to HMRC at any stage.

HMRC has a very clear methodology for reviewing and escalating appeals. If your initial attempt has failed, you should do the following.

(1)  Ask HMRC to review the decision – this will always be carried out by an officer who wasn’t involved in the original decision to ensure impartiality. You should receive a response within 45 days, unless HMRC tell you otherwise.

(2)  You may request the tax tribunal to hear your appeal – if the review process has not concluded in your favour but you still disagree then you may appeal to the tribunal where your case will be heard by a legally qualified judge, usually accompanied by a non-legally qualified expert member. This will be held in an HM Courts and Tribunal service venue.

(3)  Consider Alternative Dispute Resolution (ADR) – Alternative Dispute Resolution is essentially a mediation service led by a neutral third party. These experts offer alternative approaches to resolving dispute in situations where other methods may have failed. Using face-to-face meetings and telephone conversations, ADR is a useful solution although it can incur costs. These are sometimes jointly paid with HMRC.

ADR would never normally be used during a criminal investigation.

How can we help?

If you’re struggling to make HMRC payments, or want help dealing with HMRC threats regarding VAT, PAYE, self assessment or corporation tax problems, we can help. Please call us on 08000 746 757, email: info@companydebt.com, or use the live support feature on our website.