When the self assessment system was first introduced, it was done on the basis that there would be a random selection of returns each year that would be enquired into. The identification system moved to a computerised risk analysis and has now evolved to a sophisticated automated analysis to identify higher risks or tax irregularities. The information at HMRC’s finger tips is significant and it is resourcefully analysed by their sophisticated software systems ahead of an officer or inspector considering opening an enquiry. In simple terms, a considerable amount of analysis has been undertaken before an enquiry is opened and it is likely that a reason has been identified why it should be opened.
Not all enquiries opened are done so because of a known tax irregularity. It could be that HMRC have identified an industry sector where tax irregularities are common resulting in more “random” enquiries.
HMRC will issue a letter opening an enquiry which will specify records and information desired and may seek clarification on specific points. Where all or considerable business records are desired, the enquiry will be a full enquiry. Enquiries can often be a prelude to more serious investigations and where there is concern over tax affairs generally, it would be prudent to consider seeking specialist advice for an independent opinion.
Once an enquiry is opened, HMRC may through correspondence request information and they may suggest a meeting to discuss tax matters or suggest attending say a business premise. All of these requests should be managed:
Information should not simply be passed to HMRC without full consideration of the impact of providing it. A pre submission review should be undertaken to ascertain whether there are identifiable tax irregularities or to identify where HMRC line of enquiries will go.
Where a meeting is suggested, it indicates HMRC see that meeting as having a commercial benefit. HMRC’s guidance to inspectors states:
“Often a meeting is a good way of breaking the deadlock but bear in mind that holding a meeting can be expensive and involve a lot of time so you need to be clear what you expect to achieve. You should always prepare thoroughly for a meeting and if there are technical issues to discuss you should consult TG (technical guidance team) before the meeting and, if the technical input is substantial, someone from TG will be expected to attend the meeting and take the lead on that particular aspect. But in any case at least two members of HMRC should be present at any meeting.”
HMRC’s internal guidance indicates that:
The officer desiring a meeting needs to consider the commercial benefit
Full preparation should be taken including technical analysis
The officer should consider who else should be in attendance
Holding a meeting at a business premise may cause undue disturbance to the business and may also be an opportunity for HMRC to seek access to business records which have not been fully considered. The suggestion of or actual meeting needs to be carefully considered and managed.
You may find our FAQ useful.
Where HMRC carry out enquiries and review records, they set out discrepancies and the additional tax (interest and penalties). In certain situations it may be more appropriate for an adviser to consider the areas where HMRC have concerns, review and present their analysis of any tax irregularities. This may result in a more beneficial approach as HMRC will often seek to quantify liabilities based on assumptions/estimations and extrapolation. Where the tax liability identified by HMRC is disagreeable, the onus of proof to establish otherwise lies with the taxpayer, which is likely to require specialist support and advice.
The enquiry process is intended to result in a settlement of arrears of tax, interest and penalties (and future compliance). HMRC can charge a penalty of up to 100% of the tax due. The penalty can be mitigated based on the level of disclosure, co-operation given and the seriousness of the irregularities. Whilst a penalty of 100% is technically achievable, HMRC set out specific guidance on the calculation of penalties and in most enquiry cases the penalty will be much lower if correctly managed.
Where a settlement cannot be agreed, alternative course of action can be considered including dispute resolution (appointment of a mediator) or proceeding to tribunal.