Whether it’s a knock on the door, a phone call or a letter with the tell-tale HMRC logo, there’s little that will strike more fear into the heart of any individual or business owner than an unexpected enquiry from HM Revenue and Customs (HMRC).
No matter the scale of the business, there will be common concerns about financial liability and penalties. Worries around future planning, working cashflow and of course the impact of taking time away from business-critical operations, not to mention the consequences on mental health.
However, it’s important to note that some investigations are routine and end with no additional tax liability. Nevertheless, with the average length of an HMRC enquiry being between one - two years it’s still crucial to take any HMRC enquiry seriously, co-operating fully with HMRC, and seeking professional advice.
During recent years, HMRC stated that their priority was to deliver government support to protect livelihoods and support businesses to survive challenging financial times. It’s a commitment that was certainly borne out in how sympathetic HMRC were during that Covid period.
The times they are a-changing
However, at £39.8 billion, the tax gap – the measure of the difference between the amount of tax that is owed and the amount that is collected - is as large as it’s ever been. In addition, HMRC have identified that £24 billion of this tax gap comes from SME businesses. The pressure is therefore intensifying on HMRC to ramp up their activities in relation to tax compliance, and crack down on tax avoidance and evasion.
From our own experience at AAB, it’s clear that HMRC have accelerated their pursuit of unpaid tax. In fact, they have opened 1,091 serious tax investigations in the UK in the past year, according to law firm, Pinsent Masons1. In 2022/23, every pound spent on investigations into wealthy individuals brought in an extra £30 in tax – up from £28 in the previous tax year. HMRC’s Large Business Directorate saw even greater returns, generating £58 in extra tax per pound spent.2 Combined with an ever-tightening squeeze on the public purse, it’s a trend that is only set to increase.
There are two main methods of HMRC recovering underpaid taxes where reporting failures exist:
HMRC enquiries or compliance checks
The first is classed as an enquiry (or compliance check), where HMRC contact businesses or individuals by letter or phone call, or even in person, to query unreported or under-reported income.
This can range from omitting to notify HMRC of bank interest on a tax return, to failing to declare millions of pounds worth of sales.
During a full enquiry, HMRC can review all business records, usually because they believe that there is a significant risk of an error involving business or personal taxes. When investigating limited companies, they might look closely into the tax affairs of company directors as well as the affairs of the business itself.
Where HMRC believe that deliberate/fraudulent behaviour has occurred to underpay taxes they will open an enquiry under Code of Practice 9 (COP9). These enquiries are the most serious civil enquiry cases that HMRC can raise. They are used for cases where a taxpayer is suspected of serious fraud, and usually cover the past 20 years of their tax affairs.
Voluntary disclosures
A voluntary disclosure may be required in certain circumstances, from a disclosing a careless mistake in a tax return, through to voluntarily disclosing a history of deliberate failures.
HMRC look very favourably on taxpayers who make voluntary disclosures, as they have taken the proactive step of notifying HMRC of any failures. Consequently, tax liabilities , interest and financial penalties for a voluntary disclosure can be lower than for a ‘prompted’ enquiry, where HMRC have instigated and opened an enquiry. It’s therefore imperative that taxpayers take the first step in disclosing any errors leading to underpaid taxes to HMRC before any enquiry starts
The tax investigations team at AAB works closely with individuals and business owners at every stage of an enquiry or disclosure process, from initial approach through to final settlement. We negotiate with HMRC to mitigate taxes, interest and financial penalties wherever possible.
The Digital Disclosure service
Where voluntary disclosures are required, HMRC accepts disclosures about errors online using its Digital Disclosure Service. This could apply to a business or an individual that has not declared all of its income, or an entity that has not registered with HMRC at all.
If a disclosure involves income, assets or gains outside the UK, there is a specific Worldwide Disclosure Facility that can be used to make an offshore disclosure.
At AAB we complete the digital disclosure on behalf of businesses and individuals, and calculate the all liabilities due. There is no requirement for individuals to attend meetings with HMRC, and the vast majority of cases these disclosures are approved and accepted.
Experience is the best teacher
The difference between a successful outcome which mitigates any taxes, interest and penalties, and one which sees excessive liabilities paid, or names published by HMRC, is frequently a subtle one, hinging on the experience of the tax professional. Our tax investigations team at AAB has years of experience across different specialisms including, Corporate Tax, R&D, Private Client, PAYE and Indirect Taxes. Indeed, many have an HMRC background, giving us the insider track on how they approach tax enquiries.
It’s a very nuanced field, requiring the most diplomatic of negotiating skills blended with the sharpest eye for detail and most in-depth knowledge of tax legislation. Where appropriate AAB also work closely with colleagues in the legal profession, providing much needed reassurance, whilst also ensuring matters are resolved as quickly and efficiently as possible, so that knock at the door needn’t be quite so daunting.
If you do wish to discuss any of the matters contained in this article please don’t hesitate to contact Stuart, or any member of the AAB Tax Investigation & Dispute resolution Team.
HMRC Tax Investigation Support & Defence by AAB