Our Guide to Help You Survive an HMRC Tax Investigation
Most of us will have limited dealings with HMRC throughout our lives. Even those of us who run our own businesses and are part of self-assessment will generally find themselves confined to obligatory drudgery of the 31st January deadline. But what happens if HMRC decide that your case merits a compliance intervention. Read our tax investigation survival guide if the dreaded brown envelope lands; notifying you that HMRC have launched an investigation or compliance check.
It is easy to underestimate HMRC based upon the work undertaken by most of their officers. After all, 80% of HMRC staff work within the processing business stream. They are generally there to help us; whether that be with tax code problem or perhaps with some guidance in completing self-assessment tax return. But what about the remaining 20% of HMRC staff that work in compliance?
HMRC compliance officers and tax inspectors are generally more senior in both grade and experience. Clearly when looking a compliance; HMRC want to ensure that their very best staff are working at the sharp end. So the first question you need to consider when that brown envelope arrives is; Do I need help? Invariably the answer will to that question always be yes.
What is likely to trigger an HMRC investigation?
Firstly, let us deal with the different language HMRC use during local compliance checks and investigations where serious tax fraud is suspected.
During a compliance check, HMRC will never write to you and explicitly say that you are under investigation. The language is much more neutral; almost customer service driven.
HMRC will tell you that every year a certain number of self-assessment tax returns are picked up and checked. You would be entitled to feel that the whole process is random. That you have simply been unfortunate. This is rarely the case. Whilst HMRC do select a small proportion (approximately 5%) of cases randomly; the overwhelming majority are selected according to risk. You can read more about HMRC case selection by visiting our detailed guidance.
In summary there are various factors which could flag your self-assessment tax return up for a potential tax investigation. These include:
- Continually filing your tax return late
- Increases in expenses or other reliefs
- Fluctuating profits
- Changes in accounting ratio’s
- Informants letters
- High risk sectors
- Accounts which are out of sync with industry norms
- Cash based businesses
The list is pretty much endless. Please also remember the extent and quality of HMRC intelligence searches. The old maxim about big brother watching has never been more relevant. There is one thing certain, if HMRC begin a compliance check of your self-assessment tax return; then they strongly feel that something is wrong.
What about investigations where HMRC suspect serious tax fraud?
The investigation of suspected tax fraud is conducted by a specialist arm of HMRC; known as the Fraud Investigation Service. This is very much at the sharp end of HMRC civil compliance; with cases being conducted by the very best, elite investigators within HMRC. Proceedings are conducted under a provision known as Code of Practice 9. This is a very complex and serious area of tax compliance; meriting immediate and specialist attention. We have written detailed guidance which you can read by visiting the pages below:
Contractual Disclosure Facility
HMRC Civil Investigation of Fraud Policy
The COP 9 process
What taxes can HMRC investigate?
Effectively every tax falling under the HMRC umbrella. The most common taxes that become the focus of investigation are: Insurance premium tax
- Income Tax
- Corporation Tax
- Capital Gains Tax
- Inheritance Tax
What is the tax investigation procedure?
Generally, HMRC will begin by informally asking you to provide information and / or documents to support the information detailed on your self-assessment tax return.
Requests for information and / or documents need to be reasonable and importantly required to check your tax position. You should consider HMRC information requests carefully and always seek specialist help and advice before responding. We have written detailed guidance covering the entire tax investigation procedure; which can visit by clicking on the links below.
HMRC investigation process
Will HMRC treat me fairly?
HMRC will always endeavour to treat you fairly. However, to ensure that both you and your tights are protected you should always seek advice and support from a tax investigation specialist.
How will HMRC settle my tax investigation?
There are three potential outcomes to any HMRC tax investigation.
- HMRC complete their compliance check and are satisfied that your tax position is correct
- HMRC complete their compliance check and identify that tax has been unpaid
- HMRC complete their compliance check and find that you have paid too much tax
It will come as no surprise that outcome 2 is the most likely. That said; it is important to remember that HMRC are not always correct. Mistakes happen and they happen regularly. You should always seek professional help from a tax investigation specialist. Preferably as soon as the opening letter arrives.
If it is established that tax has been underpaid for the year under enquiry; HMRC will seek to scale any irregularities back to earlier years. In most cases this will be confined to 6 years; but in some instances, up to 20 years.
Most HMRC tax investigations are closed via a contract settlement. Effectively this is a binding contract between you and HMRC; where you agree the irregularities identified and the period for which the irregularities are scaled back. Again, it is vitally important to seek professional advice before entering into a formal contract settlement with HMRC.
How long will my tax investigation take to settle?
This is a difficult question to give a definitive answer to. It can depend on several factors. For example:
- The nature and scale of the irregularities that HMRC suspect
- The procedure HMRC are using against you
- The quality of tax investigation specialist you appoint
- The personality and experience of the HMRC investigator conducting your case
- Your approach, honesty and openness
Our average engaged case time to settlement; dealing with tax investigations of varying degrees of complexity – is just 6 months.
How much will you charge me for representation?
Please visit our fees page for more information. Not only are we the number one tax investigation firm in the UK; we are also the most competitive in terms of our fee structure.
We deal with each client according to their particular needs. Whatever your income level we are here to help. We will do our level best to reach and fee agreement suitable for all parties. Please call us for an open and honest discussion in the first instance and remember our opening consultation is entirely free of charge. No time limits.
Please visit our tax investigation services and fees page for more information.
What about tax investigation interest and penalties?
If tax is paid late; then HMRC will charge you interest as part of any settlement. It is important to remember than interest is not designed to be punitive. Consequently; HMRC charge interest at just above the Bank of England base rate effective from the date the tax should have been paid up until the date of final settlement. Interest is statutory charge and cannot be appealed.
If tax has been underpaid, HMRC will also seek to penalise you for the behaviours that have given rise to the underpayment. Penalties are percentage based and only ever levied against the tax loss. Interest is excluded from the calculation.
The percentage penalty is determined by behaviours and mitigated according to the amount of co-operation and the level of help and disclosure offered during the investigation. Behaviours fall into two categories;
- Careless – where tax has been lost due to carelessness.
- Deliberate – where tax has been lost due to deliberate action.
You can read more about penalties by visiting the HMRC website
HMRC compliance check penalties
Will HMRC give me time to pay my tax investigation debts?
Yes; is the very simple answer. However, there must be a genuine need. HMRC are not in the business of credit arrangements for historical taxes if capital or assets are available to settle the debt.
You should always ask your tax investigation specialist to make HMRC aware early on that a time to pay arrangement may be required. You will likely be asked to complete an income and expenditure questionnaire and a statement of assets and liabilities. Your adviser will assist you with this.
HMRC will also seek an arrangement with you in the first instance and if handled correctly your request for time to pay will find a sympathetic ear. HMRC do not pursue debts; using their formal powers through the courts unless it is necessary. However, should you avoid the debt and fail to contact HMRC debt management; then enforcement proceedings will likely follow. This can include CCJ’s, visits from bailiffs, control of goods and bankruptcy. You must not bury your head in the sand and simply hope the matter will go away. It will not.
Will I go to prison for tax fraud?
Criminal prosecutions are still rare. HMRC prosecute approximately 1000 taxpayers a year. However, if you fail to co-operate with HMRC during any civil investigation you could quickly find yourself in trouble. You should always seek advice if HMRC write to you and inform you that an investigation into your tax affairs has begun.
Please take some time to read our detailed guidance on HMRC criminal investigations.
HMRC criminal prosecution policy
You should treat any compliance contact from HMRC very seriously. However, there are varying degrees of seriousness dictated by the procedure HMRC are using you.
Fraud Investigation Service
HMRC’s Fraud Investigation Service only deal with cases where the most serious tax fraud is suspected. They have both civil and criminal teams dependent upon how HMRC intend to proceed.
Any letter from the Fraud Investigation Service; should be given immediate attention and only dealt with by an experienced tax investigation specialist.
Tax investigations launched by local compliance are generally risk based. They make up the vast majority of compliance interventions launched by HMRC are usually dealt with via a check of self-assessment tax return.
However, you should remember that HMRC feel that something is wrong with tax affairs. They will suspect that tax has been underpaid as a result. This could be through careless behaviour; but in most instances they will seek to establish that you have acted deliberately.
These cases can quickly escalate or protract if not dealt with correctly by a tax investigation specialist. You should always seek advice and representation before communicating with HMRC on any compliance matter.
Help is out there
Tax investigation help is out there. There are many specialist firms who will be able to guide you through the tax investigation process. The mountain may seem insurmountable; but it rarely is. We hope you choose us to help you through what can be a traumatic time; but the most important thing is get that help.
Ring around, speak to as many specialists as you can. Ask questions; lots of them. Test your adviser’s knowledge. Consider their experience and background. Ask to see a CV. Be sure to make an informed decision.