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.
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.
All can provide a solution allowing the consultant to continue to trade on but will need very careful handling by an insolvency specialist and unlikely to be your accountant.
This article will 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.
These should clearly state what’s being looked into and the relevant HMRC department behind the investigation.
What is an HMRC Investigation?
While random HMRC Tax investigations used to be a relatively infrequent event, the wide range of sophisticated and effective tools at the taxman’s disposal means consultants exhibiting risky behaviour are now most likely to be targeted.
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, two areas where errors are commonly made.
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 with your standard of living
• You have income from property
• 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
If you use an accountant, HMRC will usually contact them instead if they have the authority to do so. You may have to pay a penalty if you fail to respond to a request for information or refuse a visit.
How do I stop an HMRC Investigation?
HMRC aims to give the right support to small businesses that are genuinely trying to file their tax returns and make their payment correctly. If you have made an honest mistake, there shouldn’t be anything to worry about as HMRC has a range of initiatives to help business customers, such as Time to Pay.
You should also consider hiring an accountant if you don’t have one already. Just as you wouldn’t attempt to fix your own boiler, this is one time when the assistance of an expert really can help. An accountant will help you fulfil your obligations, on time and with the minimum of stress.
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.
How far back do HMRC investigate?
- Innocent errors – 4 years
- Careless Errors – 6 years
- Deliberate Tax Evasion – 20 years
What are Costs Involved?
Needless to say, HMRC investigations can be disruptive, intrusive and expensive.
One of the biggest costs you’re likely to incur as a business owner/director will result from the amount of time that must be spent dealing with HMRC, rather than concentrating on growing the business. However, there are also a number other costs you will incur.
While the costs of the actual investigation will be covered by HMRC, an investigation will typically involve the preparation of books and records before the inspector visiting your premises, and this is another area where costs can be incurred.
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.
For larger businesses, tax investigations take an average of 16 months to complete, and without the appropriate insurance in place, it can cost in the region of £5,000 to pay an accountant to deal with HMRC’s requests.
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.
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: [email protected], or use the live support feature on our website.