HMRC Investigations and Enquiries

If you’re a taxpayer in the UK, you may worry about the possibility of an investigation or enquiry by HM Revenue & Customs (HMRC). While most taxpayers will never experience such an event, it’s important to understand what an HMRC investigation entails and how you can protect yourself if you are subject to one.

In this comprehensive guide, we’ll take a detailed look at HMRC investigations and enquiries. We’ll cover topics like the stages of an investigation, common triggers, and strategies for preventing or surviving an investigation. We’ll also answer common questions like what happens at the start and end of an enquiry, what HMRC expects from taxpayers when dealing with their tax affairs, and what to do if you think your tax returns may not be correct.

We’ll explore the different types of enquiries and investigations that HMRC may undertake, including those related to suspected tax fraud. We’ll also discuss your legal rights and obligations during an HMRC investigation, as well as where to turn for professional advice and support.

Whether you’re a small business owner, a self-employed individual, or simply a concerned taxpayer, this guide will provide you with the information you need to navigate the world of HMRC investigations and enquiries. So, let’s dive in and explore this important topic in more detail.

Types of HMRC Investigations and Enquiries

There are different types of HMRC investigations and enquiries, and each one varies in complexity and duration. It is essential to understand the various types to know what to expect if you become the subject of an investigation.

1. Compliance Checks: HMRC carries out compliance checks to ensure that taxpayers are complying with tax laws and regulations. Compliance checks are typically desk-based, meaning that HMRC will review your tax returns and supporting documents to assess whether you have reported your income and expenses correctly.
2. Aspect Enquiries: Aspect enquiries focus on a specific aspect of your tax return, such as a particular expense or source of income. HMRC may ask for additional information or documentation to verify the accuracy of the information you have provided.
3. Full Enquiries: Full enquiries are comprehensive investigations that cover all aspects of your tax return. They are more detailed than aspect enquiries and may involve an HMRC officer visiting your business premises or home to review your financial records.
4. Civil Investigation of Fraud: Civil Investigation of Fraud (CIF) is a type of investigation that HMRC carries out when it suspects that a taxpayer has committed fraud or evasion. CIF investigations can be complex and may involve a criminal investigation if HMRC suspects serious wrongdoing.
5. Criminal Investigations: Criminal investigations are the most serious type of HMRC investigation and are carried out when HMRC suspects that a taxpayer has committed a serious tax offence, such as tax evasion or fraud. Criminal investigations can lead to criminal prosecution, and the penalties for conviction can be severe.

It is important to note that not all investigations and enquiries result in a finding of wrongdoing. HMRC carries out these processes to ensure that taxpayers are meeting their obligations and to maintain the integrity of the tax system. However, if you become the subject of an investigation or enquiry, it is important to seek professional advice and cooperate fully with HMRC.

What Does HMRC Expect from Me When Dealing with My Tax Affairs?

When it comes to dealing with HM Revenue and Customs (HMRC) in relation to your tax affairs, it is important to understand what is expected of you. HMRC has a duty to collect taxes and ensure that everyone pays what they owe. This means that they will investigate cases where they suspect that tax has not been paid or has been underpaid.

As a taxpayer, it is your responsibility to make sure that your tax affairs are in order and that you are paying the correct amount of tax. This involves keeping accurate records and submitting tax returns on time. You should also be prepared to answer any questions that HMRC may have about your tax affairs.

HMRC expects taxpayers to be honest and transparent in their dealings with them. This means that you should not deliberately withhold information or provide false information. If you do make a mistake or realise that your tax affairs are not in order, it is important to rectify the situation as soon as possible.

HMRC also expects taxpayers to cooperate fully with any investigations or enquiries. This includes providing any information or documents that are requested in a timely manner. Failure to cooperate with HMRC can lead to penalties and potentially criminal charges.

In summary, when dealing with HMRC, it is important to be honest, transparent, and cooperative. By doing so, you can help to ensure that your tax affairs are in order and that you avoid any unnecessary penalties or legal action.

What to do if you think your tax returns may not be correct

If you think your tax returns may not be correct, it’s important to take action as soon as possible. Failing to do so could result in an HMRC investigation, which can be a stressful and time-consuming experience.

The first step is to review your tax returns and ensure that all the information is correct and complete. If you discover errors or omissions, you should correct them as soon as possible.

If you are unsure about whether the information is correct or not, you should seek professional advice from a tax expert. They can help you identify any errors or omissions and provide guidance on how to correct them.

It’s important to note that if you knowingly submit incorrect tax returns, you could be subject to penalties or even prosecution. However, if you voluntarily disclose any errors or omissions, you may be able to avoid penalties or reduce the amount of any penalties that are imposed.

In summary, if you suspect that your tax returns may not be correct, it’s important to take action as soon as possible. This will help you avoid an HMRC investigation and ensure that you are compliant with your tax obligations.

Can you tell me more about tax fraud?

Tax fraud is a serious criminal offense that involves intentionally and dishonestly providing false or misleading information to HMRC to reduce the amount of tax owed or to obtain a tax refund that you are not entitled to. Tax fraud can take many forms, such as failing to declare all sources of income, claiming false deductions or credits, or creating fake invoices or receipts.

HMRC takes tax fraud very seriously and has significant powers to investigate and prosecute individuals suspected of committing tax fraud. The penalties for tax fraud can be severe, including fines, interest, and even imprisonment.

If you suspect that you or someone else has committed tax fraud, you should seek professional advice immediately. A tax expert can help you assess the situation and determine the best course of action. It is essential to be honest and transparent with HMRC, as failing to cooperate with an investigation can make the situation worse.

Remember that prevention is always better than cure when it comes to tax fraud. Keep accurate records, report all sources of income, and seek professional advice if you are unsure about your tax obligations.

What Happens at the Start of an Enquiry?

When HMRC decides to open an enquiry, you will receive a letter notifying you of this decision. The letter will explain the reason for the enquiry and what aspects of your tax affairs will be under scrutiny.

The first thing you should do is read the letter carefully and make a note of any deadlines given for you to respond or provide information. It is essential that you respond to HMRC’s initial request promptly and accurately to avoid any further action or penalties.

It is also crucial to seek professional advice at this stage, especially if you are not sure how to proceed. A tax adviser or accountant can help you understand what information HMRC is requesting and assist you in preparing your response.

It is important to note that an enquiry can take time to resolve, and it may require you to provide extensive documentation or attend meetings with HMRC officials. Therefore, it is crucial to keep a record of all communications, including emails, letters, and phone calls, to ensure you have an accurate record of the enquiry’s progress.

Remember, the sooner you respond to HMRC’s initial letter, the better. By responding promptly and cooperating with HMRC’s requests, you will be better placed to bring the enquiry to a satisfactory conclusion as quickly and smoothly as possible.

What can trigger a tax investigation?

Tax investigations can be triggered by various factors, some of which are outside your control. However, some factors can be avoided to reduce the likelihood of an investigation.

1. HMRC risk profiling: HMRC uses a risk profiling system to identify individuals or businesses that are more likely to evade tax. If your tax returns have discrepancies or inconsistencies, you could be at higher risk of being investigated.
2. Random selection: HMRC may select individuals or businesses for investigation at random as part of their compliance checks.
3. Third-party information: HMRC has access to information from third parties such as banks, credit reference agencies, and social media platforms. If this information shows discrepancies in your tax returns, it could trigger an investigation.
4. Whistleblowers: HMRC encourages whistleblowers to report tax evasion or fraud. If someone reports you, it could trigger an investigation.
5. Large or unusual transactions: Large or unusual transactions, such as the sale of a valuable asset, may raise suspicion and trigger an investigation.

It is worth noting that an investigation does not necessarily mean that you have done anything wrong. It is simply a compliance check to ensure that you have paid the right amount of tax. However, an investigation can be time-consuming, stressful and costly, so it is important to ensure that your tax affairs are in order to avoid any unnecessary investigations.

If you are concerned that you may be at risk of an investigation, it is important to seek professional advice from a tax expert. They can help you to identify any potential issues and ensure that your tax affairs are in order.

What happens during an enquiry?

During an enquiry, HMRC will conduct a thorough investigation into your tax affairs. This investigation can cover many areas of your business, including your personal and business bank accounts, expenses, and tax returns. HMRC can request information from you, such as bank statements, receipts, invoices, contracts, and any other documents related to your business.

HMRC may also request to interview you or other individuals who may have relevant information about your tax affairs. During an interview, HMRC will ask you questions about your business, your expenses, and your tax returns. It is important to be truthful and cooperative during an interview, as providing false information to HMRC can result in serious penalties.

The investigation can be time-consuming and stressful, but it is important to remain calm and cooperate with HMRC. If you do not provide the information that HMRC requests or do not cooperate during the investigation, HMRC may use their legal powers to obtain the information they require. This can include searching your premises or seizing documents, which can be extremely damaging to your business.

It is important to seek professional advice if you are facing an enquiry from HMRC. An experienced accountant or tax advisor can help you navigate the process, provide guidance on what information you should provide, and ensure that you are compliant with HMRC’s requests.

What to do if you think your tax returns may not be correct

If you are concerned that your tax returns may contain errors or omissions, it is important to take action as soon as possible. The longer you wait, the more complicated the situation can become. In order to rectify any mistakes, you will need to amend your tax returns.

To amend your tax returns, you should use the online self-assessment service or submit a paper tax return, if you have not already done so. If you need help amending your tax returns, you can seek advice from a tax professional.

It is important to note that amending your tax returns may trigger an enquiry by HMRC. However, it is always better to be proactive and correct any mistakes before HMRC discovers them during an investigation or enquiry.

If you are concerned that your tax returns may contain errors, contact us for professional advice on how to rectify the situation.

Can I complain if I feel threatened by HMRC?

If you receive a letter or communication from HMRC that makes you feel threatened or intimidated, you have the right to complain. HMRC has a complaints procedure that you can use to express your concerns and seek resolution.

The first step is to contact the individual or office that sent you the letter or communication and express your concerns. You can do this by phone or in writing, and you should make a note of the date and time of your communication.

If you are not satisfied with the response you receive, you can escalate your complaint to a higher level within HMRC. This could involve writing to the HMRC Complaints Team or contacting the Adjudicator’s Office, an independent body that investigates complaints about HMRC.

It is important to note that complaining about the tone of a letter or communication will not stop an HMRC investigation or enquiry. However, HMRC has a duty to treat taxpayers fairly and with respect, and if you feel that this has not been the case, you have the right to complain.

What are the usual stages of an enquiry or check?

HMRC enquiries or checks have several stages, which taxpayers need to understand to respond appropriately. Here are the typical stages of an HMRC enquiry or check:

1. Opening the enquiry or check: This stage marks the beginning of the enquiry process. HMRC notifies the taxpayer that they are going to investigate their tax affairs.
2. Gathering information: HMRC will request information from the taxpayer, and they must provide it within a specific deadline. This information can be related to personal or business finances, and HMRC can ask for bank statements, receipts, invoices, and other documents.
3. Examination of Information: After gathering the required information, HMRC examines it carefully. They may request more information if the existing documents are not sufficient.
4. Discussion: If HMRC finds something that needs clarification or correction, they will contact the taxpayer to discuss it. The taxpayer can provide their explanation or provide additional information to satisfy HMRC.
5. Proposed adjustments: Based on the examination of the information, HMRC may propose adjustments to the tax return or tax liability. The taxpayer has the right to disagree with the proposed adjustments and can provide their reasons for doing so.
6. Finalising the enquiry or check: After considering the taxpayer’s response to proposed adjustments, HMRC will finalise the enquiry or check. They will either agree with the taxpayer’s explanation or issue a notice of assessment and demand for payment.

It’s essential to understand the stages of an enquiry or check, as each stage requires a different approach. Failing to comply with HMRC’s deadlines or provide relevant information could result in fines, penalties, or even prosecution.

What is tax fraud?

Tax fraud occurs when a person or business deliberately under-reports or fails to report their income to HMRC in order to avoid paying the correct amount of tax. This can include falsifying invoices, exaggerating expenses or not declaring all of your income. Tax fraud is illegal and HMRC takes it very seriously.

Some examples of tax fraud include:

• Not declaring all of your income
• Claiming fake expenses
• Under-reporting the amount of tax owed
• Using offshore bank accounts to hide money and avoid paying taxes

If HMRC suspects that you have committed tax fraud, they may start an investigation into your affairs. This can be a very serious matter and may lead to criminal prosecution. It is important to seek legal advice if you are under investigation for tax fraud.

It is important to note that there is a difference between tax avoidance and tax evasion. Tax avoidance is legal and involves using legitimate means to reduce your tax bill. Tax evasion, on the other hand, is illegal and involves deliberately failing to pay the correct amount of tax. HMRC has a duty to investigate cases of tax evasion, but they do not have the power to investigate cases of tax avoidance.

What if I do agree with the proposed schedule of adjustments?

If you agree with the proposed schedule of adjustments provided by HMRC, it is important to notify them as soon as possible. Once you have agreed to the proposed adjustments, HMRC will send you a final calculation of how much tax you owe.

It is essential to check this calculation carefully to ensure that it is correct. If you notice any discrepancies, you must contact HMRC immediately to resolve the issue. Once you are satisfied with the calculation, you should arrange to pay the tax owed as soon as possible.

If you are unable to pay the full amount owed at once, you may be able to arrange a payment plan with HMRC. This will allow you to spread the payments over a period of time, making it easier to manage your finances. However, you should be aware that interest and penalties may be charged on any late payments.

It is important to keep a record of all communications with HMRC, including any phone calls or letters, and to keep copies of any documents that you have sent or received. This will help you to keep track of your progress and ensure that you have evidence to support your case if necessary.

In conclusion, if you agree with the proposed schedule of adjustments, it is important to act quickly to resolve the issue and pay the tax owed as soon as possible. It is also important to keep detailed records of all communications with HMRC and to seek professional advice if necessary.

When can HMRC open an enquiry and when can they carry out a check?

HMRC has the authority to check and enquire about your tax returns, even if you have submitted them correctly. Here are some common scenarios where HMRC can open an enquiry or carry out a check:

Random checks: HMRC has the authority to carry out random checks on individuals or businesses to ensure that they have paid the right amount of tax. These checks can be carried out on a completely random basis or based on certain criteria such as industry or sector.

Information discrepancy: If HMRC comes across any discrepancy in the information provided by you, they may open an enquiry. For example, if your income reported on your tax return is not in line with the information they have received from other sources, such as your employer, they may start an enquiry.

Suspected tax fraud: If HMRC suspects that an individual or a business has committed tax fraud, they can open an enquiry. Tax fraud is a serious criminal offense that can lead to severe penalties.

Tax evasion: HMRC can carry out checks if they suspect that an individual or business is deliberately evading tax. This can involve hiding income or assets, not declaring taxable income, or failing to register for tax.

Self-assessment: HMRC can open an enquiry if they find that there are errors or inconsistencies in your self-assessment tax return. This can be due to mistakes or omissions made by the individual while submitting the tax return.

It is essential to note that HMRC has the right to check and enquire about your tax affairs, and it is crucial to ensure that your tax returns are complete and accurate. Failure to comply with HMRC’s requirements can result in significant financial and legal consequences.

I have received a letter asking me questions. What do I do?

If you have received a letter from HMRC asking you questions about your tax affairs, it is important that you respond promptly and accurately. Ignoring the letter could lead to further action from HMRC, and failing to provide accurate information could result in penalties or even prosecution.

The first step is to carefully read the letter and make sure you understand what information HMRC is requesting. It is important to provide only the information that is being asked for, as providing irrelevant information could raise further questions and prolong the enquiry.

If you are unsure about any of the questions or do not have the information readily available, you should seek professional advice from a tax expert or an accountant. They can help you understand the questions and provide the relevant information to HMRC.

When responding to the letter, it is important to be honest and provide accurate information. Making false statements or withholding information can be seen as tax evasion, which is a criminal offence. Additionally, if you do not respond to the letter within the given timeframe, HMRC may begin to take further action and issue penalties.

In summary, if you receive a letter from HMRC asking questions about your tax affairs, it is important to respond promptly, accurately and honestly, and seek professional advice if necessary.

How long do HMRC tax investigations take?

The length of an HMRC tax investigation can vary widely depending on the complexity of the case, the amount of money involved, and how cooperative the taxpayer is during the investigation. In some cases, an investigation may be concluded within a few weeks, while in other cases, it may drag on for years.

A routine tax check by HMRC usually takes around 3-6 months to complete. If HMRC decides to launch a full investigation, it may take up to 18 months or more, depending on the complexity of the case. The investigation may involve interviews with the taxpayer, third parties, and the collection of information from a variety of sources, such as bank statements, invoices, receipts, and tax returns.

If HMRC finds evidence of wrongdoing, the investigation can result in a settlement, criminal prosecution, or civil penalties. In some cases, the taxpayer may choose to settle the case before the investigation is completed, which can speed up the process.

It’s important to note that the length of an investigation can cause a significant amount of stress and anxiety for the taxpayer, and can also result in significant costs if professional advice is needed. Therefore, it’s important to cooperate with HMRC and seek professional advice if you are facing an investigation.

Do HMRC always prosecute?

No, HMRC does not always prosecute. Prosecution is usually a last resort, and HMRC will only take this step if they believe that a criminal offence has been committed, and there is sufficient evidence to support the charge. HMRC will typically attempt to resolve any issues through a civil investigation or by agreement before resorting to prosecution. However, if HMRC believes that there has been deliberate and serious tax evasion or fraud, they may decide to pursue a criminal prosecution. It’s worth noting that even if HMRC decides not to prosecute, there may still be significant penalties and financial consequences for the individual or business involved.

I have been asked to sign a statement of assets and liabilities. Do I have to complete this?

If you are under enquiry by HMRC, they may ask you to provide a statement of assets and liabilities. This document requires you to list all your assets, such as property, savings and investments, and all your liabilities, such as mortgages, loans and credit card debts. HMRC may ask you to provide this information if they believe you have not disclosed all your assets and liabilities on your tax return.

It is important to note that you are not legally required to sign a statement of assets and liabilities. However, if you do refuse to provide this information, it may harm your case as it could suggest that you are withholding information or trying to conceal assets. In addition, if HMRC suspects that you have failed to disclose assets and liabilities, they may take legal action to obtain the information they require, which could result in additional costs and penalties.

If you are unsure whether you need to provide a statement of assets and liabilities, it is advisable to seek professional advice from a tax advisor or accountant who can provide guidance on your specific situation.

What now?

An HMRC enquiry or investigation can be a stressful and daunting experience. However, it’s important to remember that there are steps you can take to protect yourself and ensure the best possible outcome. Seeking professional advice from a reputable accountant or tax advisor is often the best course of action, as they can help you navigate the complex and technical aspects of tax law and liaise with HMRC on your behalf. It’s also important to be cooperative and transparent with HMRC, providing them with accurate and complete information to help resolve the matter as quickly as possible. By taking these steps and remaining vigilant throughout the process, you can ensure a successful resolution to your HMRC enquiry or investigation.

Thank you for reading our guide to HMRC enquiries and investigations. We hope that you found it informative and helpful.

If you have any further questions or concerns about HMRC enquiries and investigations, or if you require professional assistance in dealing with an ongoing enquiry, please do not hesitate to contact us at Mercian Accountants. Our team of experienced tax advisors are always ready to provide you with expert advice and guidance. You can contact us via phone or email to learn more about our services. We look forward to hearing from you and assisting you with your tax affairs.