The Self-Assessment Tax Enquiry Process

Once a self-assessment is submitted an inevitable window of anxiety may start for some. This is because self-assessment has a ‘submit now check later’ approach meaning your return may be considered for enquiry for the next year (or thereabouts). 

A tax enquiry may begin with a formal notice or may take the form of a more informal approach. 

HMRC will generally adopt the formal approach of opening an enquiry to protect their right to check that return. HMRC may open a tax enquiry into: 

• a return
• an amendment to a return 
• or into a claim not included in a return

The tax enquiry legislation provides a formal mechanism to check returns. That mechanism provides a framework for both HMRC and taxpayer. The right to open an enquiry may not be subject to appeal. Unsurprisingly, neither HMRC nor the taxpayer always work within the framework. Officers do on occasion make enquiries without issuing a formal notice. It is important to check that an enquiry has been correctly opened.  

The Tax Enquiry Window: Individuals, Trustees and Partnerships

If a personal or trust return is submitted on or ahead of the filing deadline, the tax enquiry window will run for 12 months from the date received. Where a return is submitted after the filing deadline, the enquiry window is extended to the next quarter day (30 April, 31 July, 31 October and 31 January). 

The filing date depends on the method of filing. Paper returns must be filed by 31 October and electronic ones by 31 January. 

A return can be amended up to 12 months from the filing date. There is a separate enquiry window for the amendment which is up to the quarter day following the anniversary of the date the amendment was made.

If an enquiry has been closed within the enquiry window, a second enquiry may not be opened. If there is an enquiry into a return and then a subsequent amendment is made, an enquiry can be made into that amendment.  

The Tax Enquiry Window: Companies 

When a return is delivered to HMRC on or before the accounting statutory filing deadline, the enquiry window will be twelve months from the date on which the return was delivered to HMRC.

Where the return is filed late, the tax enquiry window is extended to the anniversary of the next quarter day (31 January, 30 April, 31 July, 31 October).

Where the company amends its return the enquiry window extends to the anniversary of the next quarter day from the date on which the amendment was made. 

Is A Tax Enquiry Random?

It is essential that HMRC have a targeted approach to identifying and rectifying tax irregularities. 

There are some obvious categories of taxpayers that will face regular enquiries, namely those receiving cash in return for goods or services.  However, the way in which the public pay for goods and services has changed dramatically. In 2017 at total of 13.2 billion debit card payments were made. A rise of 14% from the previous year. For the first time, card payments outstripped cash payments and the use of notes and coins dropped by 15%. In London, black cabs are now fitted with card readers. More and more market stalls also have card readers. Also, it is easy to transfer funds using a mobile banking app or digital wallet than hand over cash or write a cheque. The days of cash in hand trading is, one expects, diminishing. 

HMRC have the benefit of Schedule 23 Finance Act 2011 which provides them with data gathering tools powers. When introduced there were sixteen broad categories of ‘data handlers’. The number of categories has slowly increased to twenty-two categories. The additions have included ‘merchant acquirers’, ‘providers of electronic stored-value payment services’ ‘money service businesses’ and ‘postal operators’. The original categories included employers, agencies, person by or through whom interest is paid or credited (banks and building societies), a person who, in whatever capacity is in receipt of money or value belonging to another, business intermediaries, those receiving payments from or dealing in securities, agents managing land and property, and insurers. The data collected from data handlers is not taxpayer specific and may be requested in specific format i.e. electronically. Information is however, linked with specific taxpayers.

HMRC also have lots of other information available to them which is a matter of public record and/or held by another government department. Sources of information include the Land Registry, electoral role, council tax, planning consents, Companies House, passport control, licensing departments, business rates, import and export records and tax returns (SA/CT/VAT/SDLT). It has also been stated that HMRC obtain information from social media as well as from wider web searches.   

With the actual information available to HMRC, it would be possible to identify risks in the economy if that information were manipulated correctly. That information could be collated and analysed by an officer on their own, it therefore needs to be automated. HMRC implemented the well-publicised super snooper computer ‘Connect’. The software is a vast analytical tool creating links and patterns across millions of megabytes of data. HMRC’s Risks and Intelligence Service utilise Connect to identify taxpayer profiles showing risks that they are not compliant. They also use Connect to identify and compile specific target campaigns.  

Just two years after the Finance Act 2011, the let property campaign was launched. The campaign was a direct result of information provided under Schedule 23 Finance Act 2011 by agents managing let properties. Unbeknown to landlords, information was shared with HMRC relating to the property and its rental. The let property campaign was a commercial mechanism to have taxpayers regularise their own affairs rather than HMRC having to do all the work. Alongside the campaign, HMRC issued nudge letters as well as opened enquiries presumably as they slowly work through the long list.  

There are two other campaigns at present, Second Income and Card Transactions. Second Income is aimed at employees who undertake freelance work or run a small business in addition and don’t declare the income. The Card Transaction Campaign is aimed at targeting businesses that haven’t declared all card transactions within turnover. 

Data handlers such as digital wallets and money handlers have inevitably assisted HMRC to identify traders either through sales on the internet or on the payment for goods or services. A recent case worked involved a restaurant providing food through ‘Just Eat’ and ‘Deliveroo’ where the PayPal accounts used to receive payment for orders was directed to the owner’s personal bank account. 

When an enquiry is issued, it is likely to be targeted. HMRC still operate a Random Enquiry Programme although the sample size was 2,533 self-assessments enquiries (2015/16), 925 employer compliance audits (2017/18) and 425 corporate tax enquiries (2017/18). HMRC state that:

“Random enquiry programmes allow HMRC to estimate the extent of under-declaration of liabilities arising from the submission of incorrect returns. Each return selected is subject to a full enquiry involving a complete examination of records. Under certain circumstances, a full enquiry may not take place if the return can be verified through third party information.”

As tax advisers, it is prudent to assume the enquiry is not random and that HMRC have specifically identified areas of concern or event actual irregularities ahead of sending the enquiry letter.

Tax Enquiry Letter Checklist

1. Check the enquiry letter is correct: 
   1. Is the enquiry in time?
   2. Does the letter open the enquiry correctly?
   3. Is the letter dated?
2. Is the enquiry an aspect or full enquiry? 
3. Who is the letter from? i.e. “Technical Officer” “Counter-avoidance” “Fraud Service” “High Net Worth”.
4. Is there and informal information request and are HMRC entitled to the requested information?
5. Consider why the officer is requesting certain information and whether requests are reasonable. 
6. Are there any difficult requests for information?
7. Is the time to respond appropriate?  
8. Does the enquiry letter suggest meeting the taxpayer or a site visit? 
9. Do you know what information HMRC may have in their possession? 
10. Check whether there have been any associated enquiries. 

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