The Tax investigation process: Your Questions Answered

Are you being worried about the tax investigation process?

When a HMRC letter arrives with the immortal words “I am writing to you because I have reason to suspect you have committed tax fraud”, you will likely know one or more reasons behind the letter but still be curious about the tax investigation process how HMRC has found out and also be considering:

Also, most serious tax problems can affect family finances. It may be that a spouse is inadvertently involved or that lifestyle has been improved by virtue of not paying tax and now that lifestyle will be affected.

You may think HMRC know about one issue but not another. Hope may exist that HMRC are not actually going to seek tax on all of the issues, in particular if previous communications hasn’t indicated they know about all those issues. But, you don’t know what HMRC know and this will inevitably cause anxiety.  You may be concerned about the possible tax liability, which may be unaffordable.

The ultimate risk is prosecution and a custodial sentence. For some the risk is enough to proactively engage a specialist adviser to manage that risk. Others don’t want to come forward quite so easily, but what is the best approach?

Why don’t HMRC just tell me what they think is wrong?

Code of Practice 9 (‘COP9’) or the Contractual Disclosure Facility (‘CDF’) is basically structured to acknowledge a taxpayer who has potentially been caught and reward their willingness to regularise their tax affairs. Those who don’t embrace the tax investigation process are at greater risk of prosecution and certainly higher penalties.

HMRC won’t therefore tell you what they know because that defeats the object of you demonstrating you are a reformed character (or at least that you have acknowledged you have done wrong).

What do HMRC know?

HMRC don’t just start the tax investigation process for no reason so:

A good starting point is ‘HMRC know more than you believe they do’. HMRC have the largest database in the UK to compare you, your businesses and the assets you own against other taxpayers.

Government departments share information, for example: the Land Registry, DVLA, Border Control, Companies House, The Insolvency Service, the Courts and Tribunal services, planning authorities, government grants etc. all share information with HMRC.

HMRC can obtain third party information from over twenty broad categories including financial institutions, auctions, digital platforms/wallets, insurers on a broad group of taxpayers and request this information in a digital format and annually to keep checks on you and your businesses.

HMRC may have received information from informers – disgruntled employees, ex-spouse or an ex business partner.

HMRC also receive information from suspicions activity reports made to the national crime agency. These are reports made where a crime is suspected (that crime can include tax evasion) under anti money laundering laws. Reports are required to be made by professionals where they suspect an activity may amount to a crime.

Where HMRC has an open enquiry and the acting officer suspects something amounting to fraud has occurred, the case will be referred to Fraud Investigation Service (‘FIS’). The enquiry may seemingly go quiet although FIS will be analysing data available to them to determine whether there is a suspected serious fraud.

Why has it taken HMRC so long act?

HMRC won’t simply rely on one piece of information to suspect tax fraud. The tax investigation process doesnt start with that initial letter. For some time before the letter is issued, they will have undertaken extensive research and will undoubtedly have strong evidence of a serious tax offence. Where an act is deliberate (i.e. fraudulent), HMRC may assess for up to twenty years and therefore, the investigations you don’t know about may have been going on for several years before the letter is sent. You may have to cast your memory back several years to remember what you may have done wrong.

HMRC may have undertaken several seemingly innocent enquiries to gather information. It is not unusual for a client in receipt of a letter to have had a business subject to PAYE or VAT enquiries that didn’t identify a tax problem. That doesn’t mean there isn’t a problem – the approach may have been made with the intent of offering CDF at some later time.

Will HMRC prosecute me at the end of the tax investigation process?

If CDF is embraced and a disclosure made without material omissions, HMRC wont prosecute. However, the protection is only from prosecution against tax offences and other government departments may have a right to seek criminal prosecution for other acts, for example, breached of Company Law.

The risk of prosecution will depend on the seriousness of the potential offences. The disclosure made to HMRC may be shared with other Government departments and therefore, its preparation should be managed by someone experienced handling such cases.

Should I appoint a professional to assist with the tax investigation process?

HMRC when issuing CDF suggest you appoint a  suitably qualified and experienced professional. The work required to review extensive records, prepare a disclosure report and present the tax position to HMRC is extensive. A normal practice is unlikely to be able to cope with the additional requirements increasing the risk of HRMC taking over the investigation, making their conclusions on the tax position, seeking the tax due and referring the case for prosecution.

The disclosure contents need to be carefully drafted to be accurate and reflect the true position whilst hopefully preventing risk of prosecution from other Government departments. It needs to be undertaken in a manner that works with HMRC but also manages the best outcome for you. This could involve presenting highly technical arguments to mitigate taxes as well as considering the limitations placed on HMRC’s ability to assess liabilities. Those experienced with handling suspected serious fraud investigations will know considerably more than your average adviser how to mitigate your liabilities, whilst protecting you from the risk of prosecution.

What happens if I go bankrupt or accept being prosecuted during the tax investigation process?

It is a question asked by many who face significant liabilities during the tax investigation process. Going bankrupt might stop liabilities being collected unless you have moved assets somewhere else to avoid those liabilities. Bankruptcy won’t prevent prosecution and being prosecuted won’t prevent HMRC seeking liabilities. The reality is that if someone wants to avoid facing the civil settlement route or paying liabilities, there is likely to be pressure to prosecute from more than one angle and prevent you from doing something in the future because it may be ‘in the public interest’. It is highly likely that if you speak with an experienced professional, the situation will be resolved better than you anticipate.

If you have any other questions regarding HMRC and the tax investigation process then please drop them to us on email and we will make sure they are included in another article or on our social pages t

HMRC Tax Invesigation Process

HMRC’s tax investigation process and investigation into you or your business can vary widely. Examples include:

For further information on the tax investigation process have a look at our articles here

This article on the tax invesigation process was written by Anton Lane

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Worried about the being investigated or the tax investigation process speak to an advisor it is much better to get good advice and act now than ignore the problem.