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:
- Paper (can be conducted informally, so there’s no need for the taxpayer to attend).
- Basic case.
- Standard (for middle of the road investigations).
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 firstname.lastname@example.org.
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.