Throughout the pandemic, there was a seismic shift within HMRC; they reallocated resource in order to implement Covid-19 support schemes that meant a significant reduction in the number of compliance checks they could carry out.
As we move out of that phase of our lives (hopefully for good), HMRC are subsequently shifting their focus back to their usual ways of working, and there are some very clear trends which have emerged from their recent data release.
The number of opened compliance checks jumped from 27,000 in the first quarter of 2020-21 to 102,000 in the last quarter; that is a huge jump! These compliance checks most normally will take the form of an ‘enquiry’ into a tax return which can happen to anyone and for a number of reasons. HMRC will often use profiles to determine where to focus their resource, but additionally they undertake a number of completely random ones, to make sure their profiles are picking up everything they expect.
What is also apparent, is that not only are HMRC opening more enquiries, but they’re also closing more each quarter. That might seem obvious, but as some enquiries can take in excess of 20 years, it doesn’t necessarily follow.
HMRC issues closure notices at the end of an enquiry, and more often than not, they will tell you there is additional tax to pay. It will seem official, and anecdotally I’ve seen these explanations run to over 30 pages of reasoning. Taking into account those first quarter figures again, they closed 39,000 enquiries whilst in the last quarter that number rose to 88,000.
Many people may think that is the end of the story; HMRC have said I’ve underpaid, so they must be right, especially with a 30 page essay attached! Well, that isn’t all of the story. HMRC may have a big influence in what tax law gets made (they don’t make law themselves), yet they don’t always follow that law correctly. There are many reasons for that, which we won’t talk about in detail here, but perhaps one of the most important is their policy of hiring to drive compliance activity.
Looking at employment data for June 2020 and 2021, HMRC had 58,125 full time equivalents, rising to 60,821 – nearly an extra 3,000 full-time staff and that doesn’t even take into account the number of staff that will have left in that period and been replaced.
At that level of hiring, it is difficult to maintain standards and ensure employees understand very complex tax law. Many trainees will be let loose on complex cases early in their HMRC career, often without a full understanding of the issues. This is why professional help is always so important to find when HMRC have taken an interest in your affairs.
That is really borne out, when we look at the HMRC review figures. Once HMRC issue a closure notice, it is what is known as an ‘appealable decision’. That just means, you have a legal right of appeal against it. Many people won’t bother, being worried about the potential costs, but there is a route available which should always be pursued. That is the ‘statutory internal review’.
HMRC can offer, or you can request an internal review once the closure notice is issued. HMRC have specialist trained officers that review these cases and look primarily at three things – (1) did HMRC carry out the case correctly? (Following the tax administration laws); (2) Are their legal arguments sound? and; (3) Is there enough evidence that they would want to defend this case at tribunal?
Many people would imagine that HMRC would stand by its officers. But the evidence is that on internal review the majority of cases get completely overturned with no additional tax to pay – even when HMRC originally said there was. For the year to 2021, 10,000 reviews were carried out and nearly 6,000 were overturned – that’s 60%! 670 were also varied down, so nearly 70% were changed in favour of the taxpayer.
For that reason, we’d always recommend getting professional advice from someone that understands HMRC’s procedures and that can act in your best interest. Not only can an internal review completely override any additional tax HMRC say is due, but good advice and enquiry management from the outside can reduce the tax HMRC says is due from the outset, and can reduce the number of years HMRC seek to go back for any underpayment and reduce penalties.
HMRC assess tax based on what they say is the underlying behaviour that led to the underpayment: Say you’ve made the same mistake, every year for the last 10 years that meant you underpaid tax by £10,000 a year. HMRC can go back 4/6/20 years depending on if the behaviour was a mistake, careless or deliberate. So, in this example of a £10,000 under-assessment each year for ten years, they can either assess £40,000, £60,000 or £100,000 of tax depending on the behaviour.
Those behaviours also inform the penalty they charge. Mistake has no penalty, but carelessness can be 30% and deliberate 70% (increasing if concealed or relating to offshore aspects). So, you could find a mistake costing £40,000 and deliberate being £170,000 – a huge difference! And often, HMRC get this wrong, so proper advice is so important. Even if the behaviour is ‘careless’, it may be possible to ‘suspend’ the penalty, which means that you don’t have to pay provided you keep up with conditions imposed. Some HMRC officers do not understand the suspension conditions. For example, many will reject ‘suspension’ in cases where the error was a one-off issue. However, that’s not right, you can get suspension conditions agreed for even a one-off mistake!
Of course, that advice doesn’t always come cheap – and I understand that professional fees can be scary. There are insurance products that can protect against the cost of professional fees arising on a tax investigation and given HMRC are ramping up their compliance activity, now might be the perfect time to review your risk appetite and consider a product like this to protect yourself and your business against the cost of an enquiry and the cost of an HMRC mistake.
For more information please contact Nikki Fox on 01245 254205 or firstname.lastname@example.org .
If you have any questions about the above, or would like more information specific to your circumstances, please enter your email address below and we will get in touch: