In this article, James Cordiner, Senior Tax Consultant at Abbey Tax, summarises the process when HM Revenue & Customs opens an enquiry into a tax return and whether you need to comply with all its requests. We also look at what the outcomes could be and how the financial impact of the enquiry could be reduced.
Is it in time?
The first thing to check is the period that HMRC is investigating to ensure the enquiry notice is valid. It’s not unheard of for HMRC to issue notices when the time limit has passed, so it’s important to check the validity of the notice before providing the details requested. As a general rule of thumb, for Tax Returns filed on time, the time limit is 12 months from the date the tax return is received by HMRC.
Is the information ‘reasonably required’?
While HMRC enquiries are underpinned by the same tax legislation, different parts of HMRC operate in different ways. For example, we know that the Wealthy and Mid-Sized Business Compliance sections regularly informally request the business owners’ private bank statements at the outset of their enquiry as “it would be helpful” to see these. It is important to review HMRC’s requests for details and information in their opening letter to consider whether these are “reasonably required” for the purpose of checking the Tax Return entries.
Private bank accounts for business owners
HMRC would undoubtedly find it helpful to see the private bank statements of the business owner(s) in every case, however, that does not mean it has the right to do so. Added to this there is a misconception that if HMRC opens an enquiry into a company and makes this request, which is resisted, it can simply gain access to the personal financial records of the director(s) by opening an enquiry into their personal Tax Returns. HMRC certainly has the right to open an enquiry into the personal Tax Returns but this in itself gives no automatic right to request the personal bank statements, there always has to be justification from HMRC to make this type of request.
To meet or not to meet?
In many cases HMRC will request an early meeting with the business owners to discuss the following areas:
- The background to the business and the day-to-day activities
- The role of the business owner
- The record-keeping systems in place including any computerised records
- The business owner’s personal finances as necessary
The key point to remember is that there is no statutory obligation to meet with HMRC and while this may be its preferred action, with persuasive language used to demonstrate the benefits of meeting with HMRC, this is still optional. We always consider whether the meeting will benefit the client or HMRC.
Meetings can certainly be beneficial in allowing HMRC to gain a better understanding of a particular type of business or where complex record-keeping processes are in place. In these situations, an early meeting could allow any unusual circumstances to be discussed in detail and avoid unnecessary questions at a later date.
If you choose not to meet, HMRC should respect this right and the enquiry can be progressed via correspondence. Choosing not to meet HMRC is not a lack of co-operation with the enquiry process. As an alternative, the adviser can meet with the officer and then speak to the client about any issues that arose.
The Business Records
HMRC has a statutory right to request sight of the business records, including computerised records, for the accounting period under review. These need to be made available for HMRC to review and agreement can be reached with the officer on how and where these are to be made available. For example, these can be delivered to HMRC directly or reviewed at the adviser’s premises. There is no set way that this has to be done and this can be discussed and agreed with the case officer at the outset of the enquiry.
When HMRC complete their review, and there are further queries, these are normally summarised in a letter and this will invariably include a request for a meeting to discuss their concerns.
At this point, a meeting may indeed be the best way forward to seek to address HMRC’s concerns and this can be arranged for a mutually convenient date, time and location. In advance of this meeting HMRC should be asked to provide a detailed summary of their concerns to allow these to be reviewed as far as possible in advance of the meeting and to avoid any surprises. HMRC should also provide an agenda covering the areas they intend to discuss. Forewarned is forearmed so requesting as much detail as possible from HMRC prior to agreeing to a meeting is the best policy.
HMRC will only bring matters to a conclusion when it is satisfied that all its queries have been addressed. If any errors are identified the relevant adjustments will need to be made and where there is an underpayment of tax, interest is charged automatically, and penalties will be considered.
If any identified errors are considered to have arisen in earlier tax years, HMRC will seek to amend earlier years. It is essential that HMRC explains why it wishes to go back to amend earlier years so the adviser can ensure this meets the relevant time limits.
Given that tax investigations can go on for some considerable time, the average length of an enquiry is 16 months and nearer three years in larger cases, having insurance to deal with a tax investigation is a very sensible option.
TaxAssist Accountants offers you a fee insurance in the event of a tax enquiry. This means if an enquiry is started by HMRC, the professional fees incurred in dealing with the enquiry and mounting a defence are covered. Contact your TaxAssist Accountant for more information about this essential and sensible protection.
By James Cordiner, Abbey Tax
Last updated June 2018
Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.