HMRC Enquiries and Investigations

The short answer is that in most cases the words are used interchangeably, although the term “enquiry” is specifically referred to in the legislation in relation to tax returns. Typically “investigation” suggests a more detailed process or one where there is suspicion of deliberate failure to declare income.

HMRC now receive a huge amount of information:

1) From data mining public databases and social media.

2) From bank and credit card companies and employers.

3) Via Automatic Exchange of Information agreements with other countries

4) Third party information notices (for example requiring details of all subcontractors who have been paid).

5) Information provided by third parties such as disgruntled employees, customers or partners about tax evasion.

6) Information provided by you such as tax returns and accounts.

This information is analysed by HMRC’s Connect computer system.  For example, they may compare the level of declared income with details of vehicles registered with the DVLA or property transactions at the Land Registry to see whether the declared income supports the lifestyle.

Whilst enquiries can be random, the drive for results at HMRC means that the vast majority of enquiries are because they think that there may be underpaid tax.

Whilst occasionally HMRC may start an enquiry based on wholly incorrect information, this is fairly rare.  If having investigated the position, you remain unable to establish what the problem might be, the first step is to contact HMRC to see if they will provide more information about their concerns.

The initial approach from HMRC may be an informal request for information, or it may involve a formal enquiry into a particular return.  Either way, it cannot be ignored.  Whilst it may be that there is no legal obligation to respond to an information request, HMRC can follow this up with a formal notice which must be complied with and therefore it will normally be far more productive to make swift contact with HMRC to discuss the position, to understand their concerns and to agree when information will be provided.

It should however always be checked whether HMRC are within time to start an enquiry and if not this should be brought to HMRC’s attention. For individuals, it is important to note that HMRC have the right to commence and enquiry and review your tax return for a period of 12 months following he date that the tax return was submitted. The window for an enquiry is extended if you make adjustments, if your tax return is submitted late or is HMRC make a “discovery” (4 years). Adjustments can be made until the 31st January the following year after the tax return was due and there are further extensions for a “discovery” with careless behaviour (6 years) and for a “discovery” with deliberate conduct (20 years). The enquiry window conditions are similar for companies, as the discovery assessment periods, more information can be found here.

Where fraud or dishonesty is suspected, HMRC may make an unannounced visit.  Since the service we offer to our clients is based on our clients being open and honest in their dealings with us and with HMRC, we are only able to assist with enquiries and investigations where there is no suggestion by HMRC that they may take criminal action for tax evasion or fraud.  In such a case, specialist legal advice is in any case likely to be necessary.

There is no simple answer to this and it will depend on the nature of HMRC’s enquiry, however on average an enquiry can last anywhere between 2-36 months.  A request for simple factual information from the recent past where that information is readily available can be dealt with quickly.  However, if they have asked about historic periods where you may need to ask third parties for information or where you may need to undertake detailed analysis, it will take far longer.  We would always work with you to respond to HMRC’s enquiries as quickly as possible because this helps to reduce interest charges and penalties, and means the period of worry for you is as short as possible.  In our experience it is often HMRC that is a major cause of delay in closing an enquiry: it can often take them three months or more to respond to a letter.

An enquiry can be very stressful. We have removed the uncertainty over the financial cost of an enquiry with our Tax Investigation Fee Protection provided to clients (unless they opt-out). An enquiry can take a great deal of time to resolve, which can be hugely disruptive, particularly if you are trying to run a business – our protection is there to cover our fees in relation to an enquiry (terms and conditions apply).

Therefore, our key objective is to minimise the stress and worry for you as a result of the enquiry.  We will do this by:

1) Checking to see whether HMRC are legally able to open an enquiry.

2) Undertaking a quick initial review to estimate your exposure to tax, interest and penalties.  This means that you can start to consider how to fund the settlement.  If the likely settlement will cause financial difficulties, it may be possible to agree and instalment plan with HMRC (“Time to Pay”) over a period of up to 12 months.  They will want to understand why you can’t pay in full immediately and want it to be clear that you will be able to pay over the agreed period so it is worth starting to consider this at an early stage

3) Working with you to identify and obtain the information requested by HMRC.

4) Presenting the information requested to HMRC with any technical arguments to mitigate the settlement.

5) Negotiating a settlement with HMRC

6) Negotiating the level of penalties with HMRC.  The level of penalty is driven by the behaviour that caused the error (despite reasonable care, careless, deliberate) and the level of cooperation in resolving the enquiry.  The range on penalties is from 0% to 100% for a UK tax matter and up to 200% for an offshore matter.  This aspect of the enquiry is often considered as an aside, however the scale of difference it can make to the overall settlement is why our emphasis is on open cooperation with HMRC.