Every year, HMRC carries out enquiries into the tax affairs of an increasing number of individuals and businesses in the UK. Many people find an enquiry from HMRC disruptive, intrusive, stressful and ultimately expensive. With Making Tax Digital being phased into all areas of taxation, the information available to HMRC will only increase, providing them with more reasons to open enquiries.

There does not need to be a reason for HMRC to check your tax affairs. Every taxpayer who submits a tax return is at risk of being targeted. Many thousands of enquiries are launched each year resulting in no extra tax being charged yet accountancy fees still need to be paid.

What could an enquiry or full investigation involve for a business?

HMRC has the power to inspect business documents and assets at your premises. They can also ask for documents and ask intrusive questions about your business. They can make unannounced inspections that go back up to twenty years to investigate matters.

In recent years HMRC have launched various checks on specific industries. It is not uncommon for a business to receive a letter from HMRC advising that they want to carry out a routine VAT or PAYE check. This sounds fairly innocent but can often lead to a more in-depth enquiry because they are entitled to review all transactions across the business. IR35 and employment status disputes also seem to be on the rise

Case Study: Cross Tax Enquiry

HMRC launched a “Cross Tax Enquiry” into an engineering company that encompassed a full review of all entries on the corporation tax return and four years of PAYE and VAT records. It became evident very early on that HMRC was unsure exactly what they were looking for and were undergoing a fishing expedition. The questions asked were very detailed and seemingly endless and after one meeting alone, over 100 questions followed. Despite the best efforts of the advisor, the enquiry dragged on for two and a half years. With only minor adjustments to be made, over £35,000 of fees were settled under the Tax Protection Service.

What could an enquiry or full investigation involve for an individual tax payer?

Enquiries often involve a detailed examination of a specific item on a tax return whilst others may extend to a full review of an individual’s personal affairs.

Since 2008, billions of pounds worth of extra tax has been clawed back and the reach of HMRC’s ‘Connect’ database is ever growing. We have experienced a number of enquiries asking for evidence to support the numbers reported on a tax return. A full investigation can involve protracted correspondence with HMRC and a recent example went over a two year period where HMRC asked for worldwide bank statements and credit cards to evidence lifestyle.

Case Study: Declared Information

HMRC considered they had information to suggest a client had not declared all of their income. They launched an enquiry and refused to tell the client what information they held. The enquiry lasted for over three years and cost over £11,000 to deal with. It turned out HMRC’s information was incorrect, but the accountant’s fees were still settled under the Tax Protection Service.

Furlough scheme increases risk of enquiry

For those who have relied on a COVID-19 support scheme such as the CJRS (furlough scheme), it is likely that HMRC will be looking a lot more closely at tax returns, payments and compliance histories. Tax and VAT repayments will also be checked more rigorously alongside the usual full tax investigations.

HMRC estimate as many as 10% of claims are fraudulent and even more will have made errors. Naturally, this will result in many furlough claims being investigated by HMRC. Most of these claimants will not have abused the scheme in any way, however some innocent errors will have been made. As always, it will not only be the fraudulent cases that are selected for review.

With an overall national debt of £2.21 trillion as of March 2021, there is also a concern that the number of general compliance checks being undertaken outside of the job retention scheme will also increase significantly. Again, this will inevitably result in innocent taxpayers facing potentially thousands of pounds in unexpected accountancy fees.

With this in mind, we run a Tax Protection Service to help protect clients against the professional fees that result from most types of HMRC enquiries or full investigation. Whilst many of our clients already subscribe to this service, if you are a client that doesn’t currently subscribe then look out for our invitation to join this service which are being sent out during this month. Our current average costs per enquiry for time we spend is just over £4,000, all of which was paid by our TPS provider. Our largest enquiry to date finished with just under £45,000 paid by the TPS provider.

Please talk to your Client Manager.