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What is a tax investigation?


HMRC has the legal right to conduct checks into your tax affairs, ensuring that you are paying the correct amount of tax, both now and historically. This process is known as a ‘tax investigation’.

A tax investigation will normally take the form of an enquiry into a tax return. Where tax returns have not been submitted, HMRC may write to you requesting information, or jump straight in with an ‘information notice’. Non-compliance with such a notice can lead to an initial £300 penalty and daily penalties of up to £1,000 a day.

How will I know if I am under tax investigation?

Where HMRC opens an enquiry, the first awareness a company will likely have of this will be when a ‘compliance check’ notice arrives in the post. These notices will normally state that HMRC is enquiring into a tax return and will state the year subject to the check.

HMRC enquiries are generally either a ‘full’ or ‘aspect’ enquiry. A ‘full’ enquiry would normally check a tax return in its entirety, whereas an ‘aspect’ enquiry focuses on one particular issue.

Where either no tax return has been submitted or the issue is related to VAT, often the first sign of investigation will be HMRC issuing an ‘information notice’, often requesting huge amounts of information to allow them to ‘check the tax position’.

What happens during a tax investigation?

The tax investigators will review your business' accounts and records in detail. HMRC has the power to issue a 'third party notice' to request information from third parties like banks and other financial institutions.

If HMRC conducts a ‘full enquiry’, tax investigators will review your entire business records for the year in question. If you are a limited company, the tax inspectors may also choose to look into the tax affairs of the company directors too.

If, however, HMRC launches an ‘aspect enquiry’ they will only look at a part of your accounts. For example, an inconsistency in an aspect of a recent tax return. However, sometimes HMRC will expand their enquiry if they find they have further questions.

How far back could a tax investigation go?

HMRC can only open a tax enquiry when a tax return is within the ‘enquiry window’. This period is generally one year from the date the return was submitted. However, if HMRC investigates a year and discovers an error dating back many years, then HMRC may be able to raise assessment going back as far as 20 years. These extended time limits to raise assessments are based on the behaviour that led to an inaccuracy in a return, and so a mistake may allow HMRC to raise assessments for four years, careless behaviour for six years and deliberate behaviour for 20 years. There are also special rules when the under-assessment relates to an offshore matter.

If no tax return has submitted and it should have been, generally HMRC can go back the full 20 years under the ‘failure to notify’ provisions.

What happens when a tax investigation is concluded?

HMRC will notify you once the tax investigation has concluded and inform you of the outcome. In the majority of cases, where tax discrepancies are found you will be asked to pay what you owe, plus interest. Additionally, you could be liable for penalties which may be as high as 100% for those found to have displayed negligent or fraudulent behaviour. However, in the most serious cases criminal convictions may happen.

Can I appeal the outcome of a tax investigation?

If you don’t agree with the decision, you have 30 days to appeal it.

What if I know I have under-paid tax?

If you are aware that you have under-paid tax, it is generally better to disclose this to HMRC than wait for them to begin an investigation. It is possible to significantly reduce the amount of penalty that may be charged by making an unprompted disclosure to HMRC.

What you need to know about HMRC’s nudge tactics

Over the last few years we’ve seen it increasingly shift to alternative tactics to bring in more tax for less staff resource and it is now increasingly turning to the ‘nudge letter’.

What is an HMRC nudge letter?

The nudge letter is issued by HMRC where it has reason to believe that tax has been underpaid. That could be because of information received from an overseas jurisdiction, land registry, a crypto-exchange, Companies House, a whistle-blower, or from any other information it holds. You can see what these letters look like at HMRC’s One to Many letter Cryptoassets project .

HMRC asks recipients of these letters to check their tax affairs and ensure that they have declared the correct amount of income and gains, and if there is no problem, to take no further action. However, by receiving one of these letters it is likely that HMRC has information to suggest an underassessment. If HMRC then decides to open an enquiry and finds something wrong, it is likely to push for harsher penalties, which could be up to 200% of the tax due in the worst case.

Why is HMRC issuing nudge letters?

HMRC uses these nudge letters in campaigns and they often get referred to as ‘one to many’ letters. Two of the most recent campaigns relate to coronavirus support schemes and crypto-assets. However, we’ve also seen them used for land and property transactions (for example where a property was sold and no capital gains tax paid, or rental income that has not been declared), offshore income and gains (on which HMRC is receiving a huge amount of data since agreements to share information cross-border have been implemented), employment related expenses, residence and domicile issues, share-related issues (where HMRC has access to information on Companies House), and many others.

The use of nudge letters for suspected coronavirus support scheme issues is in response to HMRC identifying errors in many claims and is entirely separate from their continued action into more serious cases of fraud. As such, we are seeing these letters sent to those that used the scheme but didn’t get their claim completely right. How far these reviews will affect businesses and individuals that made honest mistakes in calculating their entitlement remains to be seen, but early action on receipt of a letter is sure to help.

Crypto-assets are a relatively recent phenomenon and as such are a significant area of interest for HMRC. HMRC first issued guidance about seven years ago and has been updating this guidance regularly since then, with the latest manual being released in 2021. As part of HMRC getting to grips with crypto, it has obtained huge amounts of information from several large crypto-exchanges. For tax purposes, swapping one crypto-asset for another is generally going to be a capital disposal and therefore could give rise to capital gains tax (or a loss!). Given the amount some crypto-assets have grown in value over the years, the tax and penalties could be significant. If you have any crypto-assets and aren’t sure you’ve reported correctly to HMRC, even in the absence of a nudge letter, we would suggest reviewing the position and seeing if a disclosure to HMRC would be the best course of action.

What to do if you receive a nudge letter

As with any HMRC correspondence it should be considered carefully and is unlikely to just disappear. These nudge campaigns offer taxpayers the option to get ahead of a formal enquiry and potentially secure a better outcome.

Whether you seek professional advice or not, it is important to check your tax returns and activity in light of HMRC’s letter. It may not always be the case that giving HMRC a whole host of information is the right thing to do, and a tax investigation professional should be able to assist you if you do have anything to disclose to HMRC.

What if HMRC has opened an enquiry into my tax return?

It is important that you take professional advice. Despite nudge letters growing in popularity with HMRC, the majority of its compliance activity is still the ‘standard’ enquiry. There are strict legal protections about what HMRC can and cannot ask for, protecting taxpayers from the taxman over-reaching. Our experience is that HMRC will often ask for everything that it wants and see what it gets back. For this reason narrowing down the scope of HMRC’s interest can help to focus attention on the issues, potentially saving time and professional fees. At Rickard Luckin our team of professional tax advisers has many years of experience in handling HMRC enquiries and requests for information in order to achieve the best possible results for our clients.

Is it possible to be insured against a tax investigation?

Rickard Luckin offers a Tax Investigation Service  to clients, to protect them from the professional costs, brought about by an HMRC enquiry.

If you have received a notice of enquiry, an information notice or would like to discuss making a disclosure to HMRC, please get in touch to discuss your individual circumstances.

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