HMRC Enquiries and Compliance Checks

A couple of weeks ago I attended a 3 hour seminar about HMRC enquiries and their powers to investigate taxpayers. Now I recognise that’s not everyone’s idea of a well spent afternoon, but the lecturer raised a few interesting points which I thought could be useful for you to be aware of with regard to some of the processes and powers HMRC are now widely using.

To give you some background, in the 2008 Finance Act, HMRC were given new powers that enabled them to carry out checks on the tax position of a taxpayer. They were provided with new legislation covering the conduct of the compliance checks, bringing in a common approach to enquiries across all taxes and introduced a new penalty regime for incorrect returns.

Since then, HMRC have gradually become more and more bold with their use of these new powers and with the government looking to increase tax revenues, they are using every resource available to check up on businesses and their owners.

HMRC now has powers to inspect your business records at any point during the year and can go back over your tax returns for the previous 6 years without having to justify any reason for doing so. They also have powers to request any reasonable information from you that they see fit to check your tax position.

Since January 2013 HMRC have been running a new checking process called a Business Records Check. This is an informal check that starts with a letter followed by a telephone call where they will ask question to ascertain if you are keeping adequate business records.

Depending on the answers you give, they will decide if you are likely to be able to submit an accurate tax return, then offer you additional help and guidance, or decide you are not keeping adequate records and therefore arrange a face to face visit to discuss the issues further.

If at the visit, the inspector finds your records to be inadequate they will instruct you on how they must be improved and then give you time to get your business records to the required standard. If no improvement is found on their follow up visit a £500 penalty will usually be issued.

At this point HMRC are also very likely to open up a far more detailed enquiry of your tax returns, PAYE, Vat or any other aspect of the tax system they feel appropriate, however, to do this, they must first issue you with a written notice.

In addition to this new compliance check, businesses can still be selected for an enquiry without prior phone calls and checks on your business records. HMRC have access to a vast amount of information and they have new powers to request information from a whole variety of sources such as banks, insurance companies, Land registry, charities and pretty much anyone else who holds personal data on you, as long as they can show that the data is relevant to your tax position. This information is gathered to pin point variances and anomalies within the tax returns and accounts you file each year and inspectors select a sample of businesses to visit based on these findings.

A formal enquiry can range from a single visit by an inspector, to a more complex case that can span several years with disputes, letters and compromises on both sides.

Are you aware that Inspectors now also have the right to enter your business premises and inspect any asset or business document on the premises? They are not, however, allowed to force entry onto your property, this is strictly beyond their powers unless they have a court warrant.

The inspectors are given very specific guidance on what they can and can’t do at your premises, for example they can request to see your sales invoices, they can’t freely dig through your filing cabinets until they find your sales invoices. If you don’t feel what they are asking for is relevant or appropriate you have the right to deny access but the inspector can take his request to a tribunal if considered important.

I would strongly suggest that if you are to receive a visit from HMRC that the first person you call is your accountant who should attend the visit and ensure that the inspector isn’t over stepping their powers.

As I mentioned, with these new powers, has come the introduction of a new penalty regime. Penalties for errors or omissions on a tax return vary from zero all the way up to 200% of the underpaid tax depending on whether the mistake was careless, deliberate or deliberate and concealed from HMRC.

Penalties are on a sliding scale depending on the nature and seriousness of the error, how it came to HMRC’s attention and how early in the process you admit your guilt and disclose all the facts to the inspector.

The penalties are now significantly greater than they used to be so it’s now more important than ever to get your tax returns right and obviously using a fully qualified accountant like myself can ensure this is the case.

Finally to round up, this is just a very brief introduction to the area of HMRC enquiries and the full legislation and guidance is highly detailed and fairly complex but hopefully you may be a little more prepared should you get a letter or phone call from HMRC in the near future.

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A guest post from our member Adam Hotson of APH Accountancy