How to handle an HMRC tax investigation

Frequently asked questions for dealing with an HMRC investigation

If you’ve received a letter from HMRC about a tax investigation or compliance check, it’s natural to feel concerned. At Kreston Reeves, we support individuals and businesses through every stage of the process. Below, we answer the most common questions to help you understand what’s happening and how to respond.

What is an HMRC tax investigation?

HMRC investigations can take many forms. It can range from a simple check of a single item on your tax return to a full-scale investigation into your business or personal finances. At the outset of HMRC’s investigation, it is essential to identify whether HMRC is:

• Opening a compliance check into a tax return;
• Requesting information to investigate your historic tax affairs;
• Offering you the opportunity to make a disclosure; or
• Conducting a criminal investigation

It will not be possible to prepare an appropriate response to HMRC without understanding the nature of HMRC’s investigation.

What should I do if I receive a letter from HMRC?

Firstly, try to stay calm. While receiving a letter from HMRC can be distressing, with the right approach, most investigations can be dealt with relatively painlessly.

Letters notifying you of an investigation do require a response. HMRC will not go away. Consequently, our advice is to speak openly and honestly with a tax disputes professional. Most tax disputes professionals will offer a free, no obligation discussion to understand your situation and provide a recommended strategy on how they would respond to HMRC on your behalf, if you were to appoint them. This will be a bespoke strategy based on your specific circumstances. However, if you do elect to speak with a professional, it is essential that you are open and honest with them. HMRC has access to considerable volumes of information and if HMRC is aware of something your tax adviser isn’t, their suggested strategy may be ineffective and lead to you quickly finding yourself on the back foot.

Not all tax disputes require specialist representation. Nevertheless, taking advantage of the free consultations offered by tax disputes experts will help you to understand your position in more detail and to determine whether appointing a specialist will be beneficial. We would firmly recommend arranging an appointment as soon as possible after receiving HMRC’s opening letter.

Why have I been selected for investigation?

HMRC opens a small number of ‘random’ investigations each year. However, the vast majority of HMRC’s investigations are ‘risk-based’. This means that if HMRC is investigating, it is highly likely that it perceives there to be a legitimate risk that you have not paid the correct amount of tax. There may be any number of reasons why HMRC perceives your tax affairs to be ‘risky’.

Some common risks include:

• Large differences from one tax return to the next;
• Unusual entries in your tax return;
• Large VAT refund claims;
• Low income reported compared to known levels of expenditure;
• Information from third parties or whistleblowers; and
• Association with industries where cash payments are prevalent.

What are HMRC’s powers during an investigation?

HMRC has wide-ranging powers to gather information and documents that are relevant to its investigations. HMRC will often exercise these powers through written requests, conducting interviews and visiting business premises.

As disputes professionals, we often find that HMRC attempts to gather more information and documents than the law says it is entitled to. There can be unwelcome consequences associated with providing too much information to HMRC. Investigations will often last longer than necessary either because HMRC has expanded their scope or because the information provided gives rise to further, unheralded concerns.

The best tax disputes professionals understand what information HMRC needs to address its risks. They will ensure their clients remain compliant with the law, without providing any unnecessary information or documents to HMRC. In doing so, investigations tend to be resolved sooner and more cost-effectively.

What time frame will HMRC’s investigation cover?

There are strict legal time limits governing HMRC’s ability to gather information and HMRC’s ability to recover unpaid tax. Regrettably, these time limits are based on a large number of factors including the nature of HMRC’s investigation, whether HMRC has identified tax irregularities, the nature of those irregularities and the behaviour that led to those irregularities occurring.

As a rule of thumb, HMRC will have either 4, 6 or 20 years to investigate. However, there are circumstances where HMRC will be restricted to investigating a single period, and others where HMRC will have between 7 and 12 years to investigate. Navigating HMRC’s time limits can be complex and, in our experience, many HMRC investigators do not fully understand the time limits governing their investigations.

A competent tax disputes professional will design a strategy from the outset that reduces the risk of HMRC’s investigation expanding further than necessary. We are regularly contacted by clients who are embroiled in HMRC disputes where they initially engaged the services of a non-disputes specialist. By far and away the most common failing we see in those cases is a failure to manage the scope of HMRC’s time limits at the outset of the investigation.

What are the possible outcomes of an HMRC investigation?

Where, following the conclusion of the investigation, HMRC is satisfied there has been no tax loss, HMRC will close its case and take no further action. Frustratingly, depending on the nature of HMRC’s investigation, taxpayers may not be provided with formal written notice of this decision.

Alternatively, where HMRC considers tax to have been underpaid, HMRC will take action to bring this additional tax into charge. HMRC will raise assessments to recover that unpaid tax. These assessments will also create a liability to interest. In the vast majority of cases where HMRC considers there to have been a loss of tax, it will also be obliged to consider charging financial penalties. If it believes penalties are necessary, it will issue separate assessments to bring these penalties into charge.

In instances where HMRC is investigating a repayment claim, following the conclusion of the investigation, HMRC will repay the amount it considers the taxpayer to be entitled to. Where the amount HMRC agrees to repay is less than the amount originally claimed by the taxpayer, HMRC will consider charging financial penalties for the initial inaccurate claim.

What if I disagree with HMRC’s decision?

The majority of HMRC decisions are appealable. There are a number of appeal avenues available to taxpayers and the most appropriate appeal route is likely to depend on your specific circumstances. However, no matter the appeal route you select, there are very strict time limits for making your appeal. You usually have 30 days to make your appeal to HMRC and if this deadline is missed, you may need to request permission from the Tax Tribunal to make a late appeal.

The key here is haste. If you disagree with HMRC, we would strongly recommend that you act quickly to make a valid appeal. Again, tax dispute professionals will help you to construct your appeal and the grounds you’ll rely on through the appeals process.

How can Kreston Reeves help?

Our experienced tax disputes team is comprised of former senior HMRC inspectors and qualified tax professionals. We have extensive experience representing clients through all manner of HMRC investigations and pride ourselves on the results we consistently achieve for our clients.

Irrespective of whether you’ve just received HMRC’s opening letter or the investigation has been ongoing for several years, contact us to arrange a free, no obligation discussion to understand how we may be able to assist you.