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My taxes are being investigated! What’s going to happen next?

My taxes are being investigated! What’s going to happen next?

Tax investigations can happen to businesses of all sizes, whether you’re a sole trader who’s been running for a year or a corporate enterprise with multiple offices that have been established for two decades. Individuals can also receive an enquiry letter from HMRC too.

 Here, our Tax Inspection Manager, Anthony Middleton, lifts the lid on what businesses and their owners can expect when they’re being investigated by HM Revenue and Customs (HMRC), as well as the steps they can follow.

All tax investigations, whether that’s PAYE, Corporation Tax, Income Tax or individual Self Assessments, are carried out by HMRC, with most companies or owners first finding out that their tax affairs are going to be scrutinised via letter. In some circumstances, HMRC will call organisations to tell them they’re going to investigate them, which tends to mainly be for VAT-related enquiries.

There are formal notices and informal requests for information, the details of which we’ll cover in a separate article at a later point. Businesses will typically be given 30 days’ notice to respond to any requests for information. If they’ve received a telephone call, then a tighter schedule may be involved. However, in all situations, it’s up to the company that’s being investigated to decide whether or not what’s being requested is manageable in terms of their own timescales. Early discussions with HMRC to amend timescales are preferable.

There are two different routes HMRC can choose to go down. They can either look at a whole return, which is known as a Full Enquiry, or a single item or area of a return, referred to as an Aspect Enquiry. 

Regardless of the route that’s being taken, investigations tend to follow a similar process, which should ideally be dealt with as follows:

STEP 1: Notify your accountant

This may seem like a really obvious point, but companies or individuals who have an accountant (or ‘agent’ in HMRC’s language), don’t always tell them that they’re going to be investigated. They assume their accountant knows everything, but this isn’t always the case. For instance, HMRC, might write to the company about three taxes, but only write to their accountant about two as they only have the authority to discuss matters where a relevant authority has been signed. Never assume that your accountant knows that HMRC has been in touch with you.

STEP 2: Analyse what’s required

So, now that you know HMRC want to look into your tax affairs, the next step is to ascertain exactly what is it they’re after. What information are they requesting to see? How can you help them answer the question(s) they’re posing? And is what they’re asking for accurate?

It’s worth noting here that the type of tax that’s being explored and how many taxes that are being investigated will impact the length of the investigation.

STEP 3: Don’t be afraid to say ‘no’

Obviously, it’s important that you’re as co-operative as possible with HMRC and provide them with the details they require within the given timescales (usually within 30 days). In fact, it’s a common fact that companies that give, help and tell during the course of their enquiry are more likely to receive reduced penalties if errors have been made and additional tax is due.

However, co-operation aside, there are instances, when HMRC do ask for information in Opening Letters that they aren’t necessarily entitled to know about at that given time.

For example, you might be a limited company and you’re being asked in your Opening Letter to share all of your personal bank statements as a company director. Usually, this is something HMRC are actually not entitled to see at this stage. It’s essential that their requests for information are made at the right time and that they’re not just simply ‘fishing’ around for information. If you’ve followed the advice in Step 1 and notified your accountant, then they’ll be able to advise you on what can and can’t be divulged at this stage. Alternatively, you may want to seek professional help from a tax investigation specialist.

STEP 4: Provide what’s required

It’s important that you do provide HMRC with the details they’re entitled to see within the given timescales. Ideally, you should produce the information that’s been requested of you through your accountant.

STEP 5: Be patient (and potentially expect to hear from HMRC again)

HMRC will analyse the information you’ve shared with them and, if they have any further questions or if there are any causes for concern raised by what you’ve divulged, then you’ll receive another letter from them.

STEP 6: If there are no problems, look out for your Closure Notice

Assuming everything’s ok and your tax affairs all add up, you’ll be issued with a Closure Notice that confirms your enquiry is over and no additional tax is due. End of investigation.

STEP 7: Check HMRC’s calculations

When a Closure Notice is issued, and HMRC issue revised assessments or calculations based on their findings, be sure to check them. These computations should be correct, but they can sometimes be wrong. Make sure any adjustments have been entered correctly, and the tax rates that have been used are correct. In certain circumstances, it can be difficult to amend them at a later date or even get them revised.

STEP 8: If there are any issues, be prepared to discuss them

If HMRC do identify any problems, there are different ways you can choose to progress your enquiry. You might want to call a meeting with them, which you can attend with your accountant or ask your accountant to attend on your behalf. The aim of this meeting should be to ascertain what the issues are that have been identified and what HMRC requires going forward.

Hopefully, by scheduling the meeting and discussing your enquiry face-to-face, any queries can be quickly identified and ironed out and you’ll hopefully receive your Closure Letter quickly. HMRC often request a meeting to see company directors or representatives. There’s no legal requirement to attend a meeting with them. All meeting requests should therefore be discussed and carefully considered.

STEP 9: Weigh up your options

If your further communication with HMRC has resulted in you having a disagreement with them (unfortunately this can happen), then now’s the time to weigh up your options.

More often than not, businesses continue to debate the issue(s) at hand for a number of months, which finally results in HMRC issuing a Closure Notice through a Decision Letter.

OPTION 1 – Internal review

If you don’t agree with the Closure Notice, then you can ask for an Internal Review to be carried out by a HMRC employee who wasn’t involved in the original investigation. There’s no additional cost involved in requesting an Internal Review. However, you do need to ensure it’s done within the correct time parameters.

OPTION 2 – Alternative Dispute Resolution (ADR)

Alternatively, you can go to ADR, where members of HMRC’s dedicated ADR team act as a mediator between the taxpayer, accountant and HMRC, and look to identify if there’s a way around the particular problem. It could be that there’s been a genuine mistake or information has simply been misinterpreted. This can be a sensible option to hopefully avoid the need to go to a Tax Tribunal.

OPTION 3 – Tax tribunal

Beyond ADR, there are two tax tribunals (1) First Tier (for the vast majority of enquiries) and (2) Upper Tier (for more complex enquiries, as well as First Tier Tribunal appeals).

There are four different types of First Tier Tribunals:

  1. Paper (can be conducted informally, so there’s no need for the taxpayer to attend).
  2. Basic case.
  3. Standard (for middle of the road investigations).
  4. Complex

Most tribunal hearings are chaired by legally qualified tribunal judges, who often sit with specialist, non-legal members – for example, doctors, accountants, surveyors or those with particular experience of disabilities or the armed services – depending on the subject matter of the hearing.

It’s worth bearing in mind that the longer your investigation takes to sort, the greater the cost implications, which could include appointing a solicitor or tax barrister at this stage. You may need to consider the commerciality of continuing with an enquiry, even if you disagree with HMRC. Tribunals can be extremely time consuming to prepare for and, as a result, expensive.

The scale and complexity of tax investigations do vary from business-to-business and individual-to-individual however, by following this best practice advice, taxpayers and their businesses stand a much greater chance of navigating their way around the investigation process as efficiently and effectively as possible. Always consider penalties when responding to HMRC as they’re tax geared and can be reduced if you fully co-operate with HMRC.

For more information or to discuss your tax investigations with one of our tax investigation specialists, contact us on 01905 777600 or mail@ormerodrutter.co.uk.


DSC6529 (1)About the author

Anthony Middleton is responsible for monitoring all of Ormerod Rutter’s tax investigations and deals specifically with Corporation Tax and Income Tax enquiries. He has been a member of the team for 13 years.

 


 

Latest in HMRC campaigns targets employers not paying minimum wage

All employees have a legal right to the national minimum wage.

Although most employers pay at least the national minimum wage, there are several common mistakes which mean that employees don’t get what they’re entitled to.

HMRC campaigns offer the best possible terms to those who voluntarily come forward to bring their tax affairs up to date. They are now providing employers with the opportunity to check that they are adhering to national minimum wage laws.

The newly launched National Minimum Wage Campaign is the latest in a series of HMRC campaigns and encourages employers who have not been paying their employees national minimum wage, or have made any errors with this, to come forward voluntarily, disclose any mistakes they may have made and pay their employees any arrears owed.

Voluntarily disclosing national minimum wage arrears through the campaign will result in more favourable terms. Those who do not do this and are caught by HMRC face penalties of up to 100% of what they owe (up to a maximum of £20,000 per employee) and will be publicly named on a list of employers who do not pay national minimum wage.

 

What are the National Minimum Wage rates?

Current rateRate from 1 October 2015
Apprentices (aged 16 to 18 and those aged 19 or over in their first year of Apprenticeship)£2.73PH£3.30PH
Under 18£3.79PH£3.87PH
18 to 20£5.13PH£5.30PH
21 and over£6.50PH£6.70PH
Accommodation offset£5.08PH£5.35PH

As announced in the Summer Budget, the new National Living Wage of £7.20 per hour for over 25s will also come into effect in April 2016.

 

If you’re considering making a disclosure under the National Minimum Wage campaign or any HMRC campaigns, you will need to notify HMRC and complete a disclosure form. It is highly recommended that you seek professional advice to guide you through this process.

HMRC have released a webinar to help employers ensure you are paying at least the national minimum wage. Watch their pre-recorded webinar here: https://twitter.com/HMRCbusiness/status/580678155150757888

Let Property Campaign brings in £7.9 million in additional landlord tax

HM Revenue and Customs have been targeting UK landlords with the Let Property Campaign since autumn 2013, in part of a series of campaigns in their continued tax avoidance crackdown.

UK Landlords who make an income from residential properties at home or abroad (including holiday homes, specialist landlords and those above the ‘Rent a Room Scheme’ threshold) have been encouraged to disclose any previously undeclared tax under the Let Property Campaign.

The campaign offers more favourable terms to those who make a voluntary disclosure.

In 2014, HMRC reports that around 40,000 landlords who had failed to come forward were sent a letter which gave them 30 days to bring their tax affairs up to date. However, those who made a ‘prompted disclosure’ as a result of these letters were not offered the same favourable terms.

Ignoring the letter risks penalties of up to 100% of the unpaid tax liabilities and up to 200% of offshore related income. HMRC can also conduct an investigation and in certain cases the result may be criminal prosecution.

It is suspected that many buy-to-let landlords with undisclosed rental profit have misunderstood the rules. The most common misconception is that all mortgage repayments can be offset, however only the interest proportion is permitted.

Even if landlord tax is undeclared or under-paid because of an error or misunderstanding, it’s important that they come forward to bring their tax affairs up to date as soon as possible.

It is reported that HMRC have raised £7.9 million in additional tax as a result of the campaign so far.

Many letting agents have also received statutory notices and are legally obligated to give HMRC access to their landlord records. HMRC can also access records held by the Land Registry to detect undeclared income. Their software is getting more sophisticated and the records they can access is increasing.

 

The Let Property Campaign is one of a series of campaigns targeting different sectors and industries, and with an increase in data gathering the message is clear – it’s better to come forward and get your records in order now, rather than trying to hide.

For more information about the penalties that apply, Download our free guide to Landlord Tax Penalties.

 

Landlords with undeclared or under disclosed rental income, who have not yet been contacted by HMRC, are strongly urged to bring their records up to date as soon as possible. Favourable terms and affordable repayment plans can often be negotiated.

If you would like to discuss this further, or you have received a letter from HMRC about the Let Property Campaign, please contact us to speak to Anthony Middleton.

Landlord tax the latest target in tax avoidance crackdown

Landlord tax is the latest target of a HMRC campaign to collect undeclared income, as part of a series of campaigns running since 2007 in their continued tax avoidance crackdown.

HMRC campaigns are aimed at groups of taxpayers where they suspect a higher risk of tax error. Since introducing them in 2007, HMRC have reportedly collected over £596 million in tax from people making voluntary disclosures, and over £338 million from follow up activities.

The legal sector have recently been targeted with the Solicitor’s Tax Campaign, and previous campaigns have been aimed across the full spectrum of businesses and professions, including healthcare and doctors, electricians, plumbers and offshore accounts and assets.

The current Let Property Campaign is an opportunity for landlords to bring their tax affairs up to date and declare previously undisclosed income to the tax authorities under the best possible terms.

If you rent out property in the UK or abroad you may be able to take advantage of the Let Property Campaign to bring your tax affairs up to date.

Find out more by downloading our Let Property Campaign Fact Sheet.

If you are considering making a disclosure, or have received a letter from HMRC regarding the Let Property Campaign, we strongly recommend that you obtain professional advice.

If you are a letting agent who is concerned about how this may affect you or your clients, or you have been approached by HMRC, we can help.

For more information, or for a free initial consultation, please contact us to speak to Anthony Middleton.

HMRC Let Property Campaign

The Let Property Campaign is an opportunity for landlords to come forward and declare previously undisclosed income to the tax authorities.

We are currently seeing more individuals receive a letter from HMRC under the title of the Let Property Campaign.

We recommend that landlords who have undeclared rental income make a voluntary disclosure to the tax authorities using the Let Property Campaign. Lower penalties and payment plans can be negotiated for those who come forward and make what is known as an unprompted disclosure to the tax authorities.

If HMRC have sent you a letter under the heading Let Property Campaign, the disclosure will be classed as prompted and the penalties charged less favourable. Remember, penalties are tax geared, and are based on a percentage of the tax due as a result of the previously undeclared income.

Should the Let property Campaign close without you receiving a letter under the Let property Campaign or you having made an unprompted disclosure, and HMRC later find out about the undeclared income, then penalties will be severe, potentially up to 100% of the tax due and landlords risk being investigated under Code of Practice 8/9 with the possibility of a criminal prosecution.

Landlords should also remember that HMRC have a wealth of information to identify individuals who have not declared rental income. This includes computerised records from other government agencies including the Land Registry, together with the details passed to them by letting agents who have been compelled to pass the names and contact details of registered landlords.

For further information, or to arrange a free initial consultation please telephone Anthony Middleton on 01905 777 600.

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