December 15, 2018

The Tax Enquiry Process

Every Tax Enquiry is different but there are certain processes to go through. We have set out below the general pattern that is followed during a Tax Enquiry.

Selection

The first thing to realise about any Tax Enquiry is that they generally start for a reason. Although HM Revenue & Customs (HMRC) will open a number of purely random Enquiries each year, this only relates to a small percentage of cases. So it's more than likely that HMRC are looking at you or your business because they have reason to believe that there could be discrepancies between the tax declared and the actual tax due. Having said that, the ‘reason’ you have been selected for Enquiry may be something as simple as your type of business trade ....... HMRC will sometimes select a specific type of trade and look closely at a number of traders within that type of business - for example traditional 'cash' businesses where the scope for undeclared income is greater.

Ultimately, with the exception of the truly random Enquiries, HMRC will have undertaken some form of risk assessment on you and/or your business before selecting you for Enquiry.
Unfortunately, they do not have to tell you the reason for opening the Enquiry so you will be very much in the dark.


Opening & Record Review

The first indication of the Enquiry is when a letter arrives from HMRC advising you that they have decided to open an Enquiry. They may ask to see only a limited amount of your records or just seek clarification on certain points if there are only one or two specific issues they want to look at, but in the case of a Full Enquiry they will want to see all business records.

Ideally, this is the point that you should contact us to seek our specialist help. We can look at the way you run your business and review your business records (in conjunction with your accountant if you have one) to try and identify any areas that may have given HMRC cause for concern. There may have been some genuine oversight or error which has created a discrepancy and if this is identified at an early stage and disclosed to HMRC, it may well be possible to reach an early settlement with the minimum of penalties and interest being charged.

Even if we can identify specific issues that the Inspector is concerned about, it is more than likely that a full review of your business will still be carried out. You will be asked in-depth questions concerning the way you run your business (and often private) affairs and you will be expected to provide full and comprehensive records and explanations.
It is common to be asked to attend an interview with the Inspector and it is at this point that many people can tie themselves in knots. Even someone who has kept impeccable records would understandably be nervous at the thought of being interviewed by a Tax Inspector. Sadly there have been many cases when perfectly innocent clients have said something to an Inspector in an interview which has come back to haunt them – usually because they are nervous and are trying to tell the Inspector what they think he wants to hear.
The first thing to realise is that there is no obligation for you to attend an interview with the Inspector – although things can become protracted if everything is dealt with via correspondence.
Again, if you have not sought our specialist help at this stage, we would recommend that you contact us before agreeing to any meeting with the Inspector. We can brief you on what to expect and how to answer questions that may be asked.  We can also accompany you to meetings with HMRC to make sure the questions raised and the answers given are appropriate. 


Establishing Liability

Once HMRC have carried out their enquiries and review of your records, they will advise you of any areas of concern and if they think that there have been discrepancies they will suggest an amount of additional liability to be paid by you. It is often the case that HMRC’s attempts to quantify underpaid liability are based on quite crude and basic assumptions and estimations. Unfortunately, unlike the general principle in law that the ‘accused’ is innocent until proven guilty, with tax the situation is the other way round. The onus will be on you to prove that the Inspectors calculations of unpaid liability are wrong.
This is again an area that ideally requires specialist skills and using us to do this for you could literally save you thousands of pounds.


Settlement

Ultimately (but not always) it is possible to reach an agreeable settlement with HMRC. Obviously our aim is the keep any settlement to the lowest possible amount. However, even once any tax liabilities have been agreed, there will still be the issue of penalties. At the moment, in theory, HMRC can charge you a penalty of up to 100% of the agreed liability. However they will reduce this percentage based on whether you made any Disclosure to them, your Co-operation during the Enquiry and also how Serious the discrepancies were. It is not uncommon for an Inspector who has failed to recover the liability that he or she was expecting, to apply disproportionate penalties in order to increase the overall settlement figure.

A new penalty regime has been introduced and details of the new system can be found by clicking here.

Negotiating the size of any penalty is not something that you should attempt on your own. We can negotiate on your behalf to ensure that any penalties charged are the lowest that can realistically be expected.


Alternative Outcome

As stated above, each Tax Enquiry is different and there can be many different issues raised during an Enquiry. If a settlement cannot be agreed, the case has would normally end up being heard before Commissioners, who will make a decision on the case based on the facts put before them . The Commissioners procedure is being replaced by a new system of Tribunals. Ideally, representation before the Commissioners/Tribunals is something that should be done by specialists such as ourselves.

The more serious Enquiry cases are dealt with by HMRC's Fraud Investigation Service. If an Enquiry is opened by this office you need urgent specialist help and should contact us without delay.