Managing HMRC Tax Enquiry Investigations

When HMRC initiates an enquiry, they’ll send you a letter notifying you of the investigation, without necessarily providing a reason. This enquiry notice must be issued within 12 months of submitting your Tax Return to HMRC, excluding late submissions. It’s wise to verify the validity of this notice. The letter will also include a suggested response deadline, typically within 30-35 days, which must be in writing. HMRC conducts two types of enquiries: Aspect enquiries, which focus on specific entries in your tax return, and full enquiries, which indicate broader concerns and may require access to all your business records for the year in question. 

Why does HMRC start a Tax Enquiry?

There are several factors that can prompt a tax enquiry. HMRC conducts risk assessments using a plethora of data sources consolidated in their Connect computer system. This includes information from your annual returns, data from financial institutions, land registry checks, DVLA records, and even publicly available social media data. It’s essential to be cautious about the information you share publicly, as it could raise red flags. While HMRC isn’t obligated to provide a reason for initiating an enquiry, understanding potential triggers can be helpful. These may include errors or inconsistencies in tax returns, business results deviating from industry norms, significant year-on-year changes, low proprietor drawings, or specific types of business activities prone to scrutiny, such as cash trades. Recognizing these triggers and being proactive can help you navigate tax enquiries more effectively. 

What information can HMRC request in a Tax Enquiry?

During a tax enquiry, HMRC may request various documents to assess your tax affairs thoroughly. These documents typically include bank statements, cheque books, credit card statements, sales invoices, VAT records, payroll records, and more. Maintaining organised and accurate records can streamline the enquiry process and ensure you meet HMRC’s requirements effectively. Fulfilling these documentation requests in a timely manner is essential to avoid penalties and expedite the enquiry process.

How to engage with HMRC Tax Enquiry?

In the event of a delayed response, the inspector holds the authority to issue a Schedule 36 FA 2008 information notice, compelling the submission of documents and particulars to HMRC. Failure to comply with this notice may result in monetary penalties. Furthermore, the inspector may repeatedly issue notices for each subsequent delay. Should you perceive the request as unjustified, you retain the right to appeal. While it’s reasonable to anticipate HMRC’s responses within similar timelines as those required of taxpayers, this may not always be the case. In instances of prolonged delays or if HMRC’s demands seem unreasonable, avenues for challenge exist, including the submission of a closure notice application to the Tribunal if deemed appropriate.

How to Comply with HMRC Tax Enquiry?

In navigating the HMRC enquiry process, it’s vital to keep track of important dates and deadlines. From receiving the HMRC Enquiry Notice to providing requested documents and responses, adhering to timelines is crucial to prevent penalties and maintain a seamless process. A recent case, Richard Monks v HMRC [2023] UKFTT 853 (TC), saw the First-tier Tribunal (FTT) issue a noteworthy judgement regarding the timeliness of HMRC’s enquiry into the taxpayer’s tax returns, determining the enquiry notice to be out of time.

How to respond to a HMRC Enquiry?

Effective communication with HMRC during an enquiry is paramount. Understanding your rights can help protect your interests throughout the process. Responding within the specified timeframe and addressing unreasonable requests are critical aspects of effective communication. Additionally, appealing decisions when necessary ensures that your concerns are heard and addressed appropriately. Leveraging expert guidance can help navigate these communication dynamics and ensure productive interactions with HMRC representatives.

HMRC possesses the authority to investigate the personal finances and circumstances of directors in cases of concern. However, it’s crucial to note that directors are distinct legal entities from their companies. Consequently, the company cannot be compelled to provide directors’ personal financial records without valid justification.

It’s not unusual for HMRC to request bank statements from proprietors. However, it’s advisable to resist such requests unless HMRC can provide clear evidence of their necessity for reviewing the tax return under examination.

Our tax barristers and solicitors provide the very best representation in negotiations and in litigation in front of the Tax Tribunal. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect including developing a strategy. 

How long do HMRC have to open an Enquiry?

The duration of an enquiry is contingent upon several factors:

• The scope of the enquiry
• The volume of information HMRC needs to review
• The specific area of taxation being investigated
• The scale of your business

On average, full enquiries typically span around 18 months, while aspect enquiries usually last between three and six months. However, in cases involving complex matters or disputed valuations, enquiries can extend much longer. It’s important to note that only one enquiry can be conducted per tax year. Once a closure notice is issued, no further questions can be raised regarding that return, unless HMRC uncovers irregularities at a later stage. Nonetheless, this does not preclude the possibility of an enquiry being initiated into subsequent returns.

HMRC Penalties for Errors and Failures to Comply

HMRC imposes penalties for late submission of returns and documentation, or delayed payment, across various tax categories. The penalty system is determined by the behaviour of the taxpayer and considers various factors:

• The nature of the error or omission.
• Whether professional advice was sought before taking action.
• The level of awareness regarding the issue; for instance, if HMRC highlighted the issue but no action was taken.
• Cooperation with the enquiry and the willingness to provide information voluntarily or if prompt was needed.

When documents containing errors are submitted to HMRC, penalties may be imposed on the inaccuracies. Similarly, failure to inform HMRC of changes that impact tax, VAT, or other duties can lead to penalties known as ‘failure to notify’ penalties. The severity of the error determines the level of penalty, with errors despite reasonable care potentially avoiding penalties, while deliberate actions with concealment can result in significant penalties. The severity of the penalty is associated with the cause of the error, with more serious reasons warranting higher maximum penalties.

Furthermore, penalties may be enforced for the submission of incorrect returns, which can encompass fines for late tax payments or fixed percentage fines for outstanding tax repayments.

Conclusion and Appeal Process Following Enquiry Proceedings

Upon completion of the enquiry proceedings:

• If HMRC determines that your original self-assessment return was accurate, the enquiry will be closed without further action.
• However, if errors or omissions result in additional tax liabilities, interest will be levied on the unpaid tax due to the delay in payment. Furthermore, the inspector may consider imposing a penalty, as outlined in detail below.

Take advantage of the end of a tax enquiry to reflect on and evaluate your business profit reporting practices. Implement measures to prevent similar issues from arising in the future.

Following an enquiry where adjustments are proposed by HMRC, you have a 30-day window to contest their decision through the appeals process.

We offer guidance and advocacy regarding the strategic methods for appealing penalties imposed by HMRC. Our team possesses firsthand knowledge of HMRC’s internal processes and the most effective approaches to contest penalties. This includes negotiating and reaching settlements with HMRC, as well as pursuing litigation in the First Tier Tax Tribunal when necessary.

Expert Tax Investigation Lawyers

If you need HMRC Tax Investigation advice, we are available to aid you at every stage of the HMRC investigation process. Members of our legal team have first-hand experience and knowledge of the internal workings of HMRC. We can provide you with the very best representation in negotiations with HMRC and defending all forms of HMRC fraud, tax inquiry, tax fraud investigation, criminal tax evasion and HMRC enquiries and investigations. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect of the investigation. Our specialist Tax Solicitors and Barristers deliver expert technical knowledge, strong negotiation skills and respected advice, which can make a pronounced difference to eventual tax penalties, charges and liability.

We provide urgent advice and representation to clients from our unique expert team of established Tax and Duties specialist solicitors and barristers with a proven track record of delivering authoritative results. Just call us on 0207 1830 529, or email [email protected].