Her Majesty's Revenue & Customs (HMRC) tax investigations – which can be carried out on businesses and individuals – can be very stressful, time-consuming and costly.
We asked James Cordiner, Markel’s senior tax consultant, to explain what happens during the process and how best to handle it.
Let’s start with the basics: what is a tax investigation?
HMRC using its powers under the law to check the accuracy and completeness of a tax return. However, HMRC must open an investigation within specific time limits – normally one year from the day the return was filed. Check this on the investigation notice because if the deadline has been missed, the investigation is invalid and you are entitled to point this out.
Are there different types of tax investigations?
Yes - full, aspect and random. Random investigations are now rare and most come about because HMRC has data that has triggered its interest. A so-called aspect investigation will look at one or more areas of a return. A full investigation is a more detailed review, while a cross-tax case extends to PAYE and VAT records.
What might trigger HMRC’s interest?
It could be something like fluctuations in business profits and costs – for example, it has information relating to the sale of assets when no capital gains tax has been declared.
Where does HMRC get information from?
Some is accessible from the public domain, but some comes from third parties such as financial institutions and other government departments. Increasing speculative enquiries about information not in the return – for example, HMRC asking for private bank statements – is still a debatable area. Get professional advice about challenging this, if possible.
So, if I receive an investigation notice – what do I do?
Check your return to see if you can see any issues that need addressing. If you find something, deal with that straight away to minimise any potential penalties. Cooperating with HMRC by providing information and documents, so long as requests for these are reasonable and relevant, will help to conclude the case as quickly as possible. If the return is correct, call your compliance officer to talk about the case and establish a rapport.
How long do I have to respond?
There will usually be a minimum of 30 days to respond to HMRC and complying with the deadline is important to mitigate the level of any penalties you might face. Talk to the case officer to discuss an extension if you need more time to gather relevant documents or because there’s been a delay in correspondence with HMRC.
What happens next?
After the initial supply of information to HMRC, there will be further correspondence to move the case towards conclusion. HMRC will normally want to meet with the business owner for a business investigation, but you’re not obliged to meet with HMRC. Only do so if you think it will be helpful, and the meeting can be held anywhere, not just on your business premises.
How long will an investigation last and what action could I face?
There’s no fixed time limit. It depends on the case and some cases are done with quickly, while others drag on for years. When the case officer is satisfied and no adjustments to the return are needed, HMRC will issue a closure notice. Where adjustments are needed, and agreement has been reached, the case will be settled through a contract settlement agreement. This shows how much tax is payable, as well as any interest or penalties.
What if I don’t agree with HMRC’s findings?
Penalties for tax return errors are issued on a sliding scale – from no penalty if it’s found you took reasonable care, to increasingly stiffer penalties for being careless or for deliberate errors and concealed errors. This is a very subjective area and is often the focus of disputes. It’s certainly worth challenging. However, whatever the dispute is about, before taking more formal action, consider using alternative dispute resolutions.
What formal action can I take?
If you can’t reach an agreement with HMRC, it will issue a formal decision and provide its view of the matter, but this will include the offer of a statutory review of its decision by an independent review officer. If there’s still no agreement, the case will go to a tribunal hearing. This is your last resort and you should consider the time and costs involved.
How can I avoid an investigation in the first place?
It seems obvious but keep accurate records and evidence of any tax advice you have sought. It could be worthwhile getting insurance to cover the costs of a tax investigation. Of course, if you do find yourself the subject of an investigation, it’s advisable to get professional representation to guide you through the process.
