HMRC’s tougher approach to tax investigations does not exclude SME’s.
Compliance checks on small to medium enterprises have been increasingly steadily over the last few years, partly because they are statistically more likely to submit returns with mistakes in them. In 2007, HMRC conceived of a specific process for investigating SME’s, which they called Single Compliance (SCP).
Like many of HMRC’s new processes, Single Compliance was designed as a streamlining mechanism to reduce delays, hone in on issues, and generally speed things up. Previously, enquiries could drag on for years, resulting in an extended period of stress for the business, and a stretch on HMRC’s resources.
Prior to SCP, HMRC used a two-pronged strategy which separated compliance checks into either ‘full’ or ‘aspect’ versions. A full check meant your entire tax affairs were open to scrutiny whilst an ‘aspect’ check meant that one or two specific issues were in question. As per the SCP model, this has been scrapped and the new process categorises businesses into four levels of risk.
If an SME comes on HMRC’s radar as being worthy of further investigation, the HMRC Compliance Team will first conduct a risk assessment. This involves some analysis of income and expenditure and a check if any red flags go up around the previous non-compliance. In addition to this, what they call ‘private analysis’ draws a picture of the lifestyle of those involved. HMRC’s powerful Supercomputer ‘Connect’ is reputedly doing Social Network Analysis as part of its remit, which means that the foolish director driving a Ferrari on his Facebook feed which declaring an income that doesn’t tally will likely land him in hot water.
SCP Stages of Risk
In the past, it was possible for checks to move from ‘aspect’ to ‘full’, but not the other way around. As per the new mechanism, SME’s can move up or down the risk assessment scale at any time.
Level One – Low-Risk Category. Compliance checks may be concluded via telephone and/or correspondence.
Level Two – Slightly higher risk, requiring a Face to Face Meeting
Level Three – Medium Risk category. The detailed review involved.
Level Four – These are high risk, complex cases where tax evasion or other forms of criminality are suspected.
Five Stages Process
Although most taxpayers will be unaware of these, HMRC has indicated that their SCP checks will involve five stages.
- Planning – Initial Risk Review, consideration if the case spans multiple taxes
- Contact – Sending of formal enquiry notices and requests for Information
- Process -Processing information received dialogue with taxpayer or taxpayer’s agent. On-site reviews.
- Resolve – Attempt to settle the case, which means agreeing on accurate tax amount to be charged
- Close – Finalisation of paperwork and, if the risk warrants it, referral to specialist risk teams (i.e CIS Review teams)
If you have questions about HMRC compliance checks and you need help, simply call 08000 746 757.