What You Need to Know About HMRC Tax Investigations

Many accountants assist their clients with legal tax avoidance processes, ensuring that their entities are as tax efficient as possible however tax evasion is illegal and can have strong consequences.

HMRC investigations often involve an enquiry into the financial circumstances of a UK individual, business or other entity. The launch of an investigation can be triggered by various events and can explore records of income, corporation ND capital gains tax, NIC, PAYE and VAT.

Investigations can commence due to human error being made on submissions.  Common reasons that HMRC get in touch are to either perform a random check or to clarify a mistake or a misunderstanding.

Some of the most common reasons for an investigation are:

  • You operate a ‘high risk’ business and accept a lot of cash payments

  • Your annual accounts have continuously shown errors, so the HMRC has decided to have a look into your business

  • Your bank or another 3rd party has given information to the HMRC that warrants an investigation

  • You’ve been highlighted by the HMRC’s ‘super-computer’ which is a relatively new avoidance system which includes information from the Land Registry and Companies’ House. If the computer finds an error, then the business will be subject to investigation by an HMRC inspector

It is important to understand the type of inquiry being conducted and consider to deal with it. Identifying the reasons behind the inquiry may assist, although HMRC will not disclose the detail at the beginning.

There are many reasons to utilise the services of an expert:

  • If you are aware of an anomaly in your business and you are unsure how to resolve it yourself,

  • If you are concerned that you could be the target of an investigation,

  • Or if you find yourself on the receiving end of an HMRC investigation or prosecution,

This is when you will need to seek specialists advice immediately.

HMRC Tax Investigation Procedure

Investigation proceedings often commence when the HMRC Inspector has concerns regarding information that has been supplied to them, usually information that can lead to a potential loss.

However, HMRC will not usually notify the person or business that they are investigating during their initial research phase.  Written correspondence notifying the subject is often reserved for when a formal investigation is launched.  At this point, the Fraud Investigation Service (FIS), (a HMRC department) will inform the subject that they are being investigated.

HMRC have various procedures to use dependent on the alleged allegation.

  • Code of Practice 8 – The procedure for investigating avoidance. This code is applied when it is suspected that tax has been deliberately under paid, but serious fraud is not suspected.
  • Code of Practice 9– A procedure that HMRC use to investigate cases of suspected serious taxation fraud.

In both cases, initial correspondence is issued often asking for further information from the subject to enable further clarification.  The letter does often advise the reason for the investigation, however sometimes this is kept confidential if it deemed necessary by the HMRC.

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Forms of Investigations

There are many forms of HMRC investigations in the UK such as;

  • HMRC Special Investigations– A serious and complex fraud investigation conducted under Code of Practice 9 where the perceived amount at risk is at least £500,000.

  • Civil Investigation of Fraud (C.I.F) – A serious fraud investigation where the perceived amount at risk is of at least £75,000.

  • Check of a Self Assessment Tax Return– An HMRC compliance check focusing on one or more elements of your self-assessment return.

  • VAT Investigation – An investigation focusing on indirect taxes or VAT.

  • Tax Credit Investigations– An investigation focusing on the credits received.

HMRC will communicate with the party involved and an advisor throughout any investigation.  Upon the inspectors’ conclusion, if a financial settlement is required, HMRC will try to reach an agreement with the subject regarding the amount of tax underpaid, interest and penalties due.  There are various penalties that  HMRC can apply such as additional charges for providing inaccurate information either carelessly or deliberately or failing to make payments on time.

HMRC investigations can take many routes, however the most serious is where HMRC suspects and has evidence that fraud has taken place.  One option in this scenario is that the senior HMRC investigators choose not to prosecute if the suspected offender is fully compliant, and therefore issues an offer via a Contractual Disclosure facility (CDF).

However, in the case that the HMRC investigator believes that insufficient returns have been made leading to irregularities, or there is a denial of the claims by the subject, HMRC may choose to prosecute.

Should you or your business find yourself being investigated, it is vital that you have support by your side to assist with the strict response deadline and to advise the best course of action.

Tax Appeals

In most scenarios, an appeal can be filed and a decision made by HMRC. They will advise of their conclusions to a case in writing and will confirm if their decision can be appealed. At this point, the subject usually has 30 days to appeal, providing reasons of why they disagree with the HMRCs findings and/or calculations and providing any further supporting information.

The cost of appeals is borne on the subject, however often the financial settlement is delayed whilst an appeal is being explored.

Once an appeal is submitted, HMRC undertake a review by an independent HMRC advisor that was not involved with the original case.  The review process often concludes within 45 days however, if it should take longer HMRC will let you know.

Speak to Our Tax Investigation Specialists

Human error can often occur when dealing with financial returns, resulting in simple mistakes, accidents, oversight, confusion, or misunderstanding of the law. No matter what the reason, when incorrect returns are identified, they must be corrected, either immediately, or after the conclusion of any HMRC investigation.

The investigation process can be stressful, and therefore the best protection from this is to keep clear and organised records of all personal and business transactions, and by appointing an accountant who will provide a double check of records before the submission to HMRC. Engaging the services of a good accountant in advance will very likely avoid the type of scrutiny that can lead to an investigation.

At Finance Equation, our specialists provide support on any HMRC concerns.  We have a team of experts who can carry out aN audit and appeal on your behalf with an independent internal review.  We can also help by handling the end-to-end process of an investigation; responding to initial HMRC enquiries, helping to build a case, or to represent clients at tribunal hearings.

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