An HMRC investigation is a very serious matter and one that, as a busy business owner, you’d no doubt rather not deal with. However, once the wheels are in motion and you receive that dreaded brown envelope in the post, there’s very little you can do. Your best bet is to try and get the matter resolved as quickly as possible so you can concentrate on running your business once again.
If you’ve been informed your business is the subject of a tax investigation, here’s what you should do…
On receiving a request for information
The first notification you will receive informing you that your business is going to be investigated by HMRC is likely to be an informal request for information. The request may simply ask for copies of certain documents or may ask you to clarify something HMRC is unsure of on your tax return. At this point, you are not under investigation. If you do not comply with the informal request for information, you will normally be sent a formal request. You are obliged to comply with the formal request and penalties may arise if you fail to do so.
If the information you send satisfies HMRC then that is likely to be the end of the matter. However, if the information you provide does not tally with the details held by HMRC elsewhere, you could subject to an investigation.
Once you’ve been informed of the investigation
If HMRC informs you that you are to be the subject of a tax investigation, then although you will not be told exactly why you are being investigated, it will be for one of the following reasons:
- There’s an omission in a tax return;
- You operate in an at-risk sector. HMRC sets up task forces to target geographic areas and specific sectors that represent a high-risk of tax fraud;
- You have done something to attract the attention of HMRC. It could be that your income fluctuates dramatically, you often submit late returns, or you claim high expenses in proportion to your income.
- Although it’s rare these days, you could also be targeted completely at random.
At this stage, you should make a copy of all the correspondence between you and HMRC relating to the enquiry and include any documents you have sent. You should also include details of telephone calls you have made along with the dates and the name of the HMRC officer you spoke to. Any information you provide to HMRC should be sent by recorded delivery.
Establishing the level of enquiry
The next step is to establish the level of enquiry, as this will give you more insight into the type of investigation to expect. There are three levels of enquiry:
- Full – This is the most comprehensive type of tax investigation and is reserved for cases where HMRC believes there is a significant risk of errors on your tax return. This will include a review of all tax records and may also look at the personal finance records of company directors and owners.
- Aspect – An aspect investigation takes place if HMRC is worried about a certain ‘aspect’ of your tax return. This is usually a sign that HMRC thinks any omissions or errors are mistakes or misunderstandings rather than deliberate attempts to evade tax. If HMRC discovers anything more serious during an aspect enquiry, it can be escalated to a full enquiry.
- Random – If you are the subject of a random enquiry then that’s just bad luck!
You should be able to ascertain the level of the enquiry from the correspondence sent by HMRC. If not, your accountant or tax adviser will be able to help.
A meeting is requested
If HMRC wants to discuss your tax affairs with you then it may request a meeting. This can considerably reduce the time the tax investigation takes. You do not have to attend the meeting but doing so will demonstrate to HMRC your willingness to cooperate and this could reduce any penalties that do arise.
You would be wise to attend a meeting with your tax adviser as they can clarify details you’re not sure of and make sure you only answer questions HMRC is entitled to ask. You should also ask HMRC for an agenda for the meeting before you attend so you can fully prepare.
During and after the meeting
Make sure HMRC sticks to the agenda. If questions are raised that do not relate directly to matters on the agenda then the question may be unreasonable and you do not have to answer. Equally, if you don’t remember particular details, don’t guess the answer; instead, send the relevant information later on. If you’re not sure of the relevance of a certain question, ask. You can also ask for the meeting to be ended or to have a break at any time.
At the end of the investigation
If HMRC is satisfied with your explanations then the enquiry should be closed without any penalties or adjustments. However, there could be some agreed adjustments if errors have been found. It could also be the case that HMRC intends to charge you with a penalty. If you do not agree with adjustments HMRC has made or penalties it has applied, you can appeal the decision to the First Tier Tribunal. If you are happy to make the payments, you should make sure you do so immediately as interest will be charged.