HMRC’s Tax Investigations | Process, Penalties, & Advice 2023 

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Written by: Liez Comendador
HMRC's Tax Investigations Process, Penalties, & Advice 2023

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Expensive, complex, time-consuming, and overall stressful—in the perspective of most taxpayers, every tax compliance check is almost always a heavy ordeal. Since HMRC generates billions of revenues from tax investigations, the scrutiny will be in for the long haul. For as long as one files tax returns, any discrepancy can be easily detected in no time.

Individuals and businesses with a good accounting team and system may think it is merely time-consuming, but it is fearsome for those without, caught off-guard in the unknown. One thing is for certain—HMRC tax investigation procedure can really consume much time.

In this article, we guide taxpayers into what is a compliance check all about, covering the types of taxes that may be under scrutiny, the enquiry triggers, types of tax checks, HMRC investigation process, what happens during and after the check, best practices to keep in mind whilst facing the ordeal, and many other crucial FAQs answered.

For comprehensive support during these challenging processes, consider exploring our Taxation Services in UK, which are designed to assist businesses and individuals navigate through the complexities of tax compliance and investigations effectively. 

What Is HMRC Tax Investigation?

To put it simply, HMRC tax investigations are about taking a closer look at individual or business tax affairs, both historically and currently, to check if they are paying the right amount of taxes. Tax investigation may also be referred to as a tax audit, compliance check, or enquiry.

A small percentage of tax checks are done randomly, so they do not automatically mean the investigated taxpayer has committed any offences. However, most of the time, they are usually due to some irregularity in their tax records or accounts with accompanying consequences depending on the reasons for their behaviour and other factors.

HMRC secures a Central Risk team that uses sophisticated software to mine data, analyse returns, compare them to other sectors, and detect any unusual activities overall. They first send an HMRC investigation letter or make a call to notify the taxpayer (or their accountants) of the investigation along with the reasons.

taxpayers can appeal against the tax investigation if they believe hmrc’s reasoning is incorrect.

Many cases revolve around not disclosing income, underpaying tax, and overstating allowable expenses. Suspected for any of these, HMRC may request the taxpayer to provide the following data: 

  • Tax amount liability 
  • Accounts and tax calculations 
  • Self-assessment simple start. Look for for specific previous years 
  • Company tax return 
  • If an employer, PAYE records and returns 
  • If VAT-registered, VAT returns and records 

From mild penalties to prosecution, anything can happen, so it is always highly recommended that taxpayers face the inspection with the assistance of tax professionals. They will serve as buffers against the probing eyes of HMRC, the latter being always alert for any discrepancies, no matter how minor they can be.

Which Taxes Undergo HMRC Compliance Check?

HMRC targets checking tax returns filed by self-employed sole traders in particular. No one is exempted from HMRC’s compliance check, whether an individual or a company. Income tax is the most commonly scrutinised, but HMRC investigation is not limited to this type of tax. Here are other types of taxes that HMRC inspects: 

Income and corporation taxes submitted to Companies House do not face routine tax audits, but VAT and PAYE do. VAT-registered businesses and workers paid through the PAYE system have to deal with tax investigations usually over five years.

What Triggers Tax Inspection?

When does HMRC investigate self employed individuals and businesses? It’s worth noting that even when taxpayers have well-organised accounts and good tax history records, they may still face random tax investigations.  

The most common reason for HMRC’s tax inspection is incorrect figures in the tax return. However, there are many other factors that determine how likely are you to be investigated by HMRC, which are as follows: 

  • HMRC tip-offs 
  • High-risk industries (e.g., prevalence of cash-in-hand transactions) 
  • Noticeable irregularities in tax return figures 
  • Frequent late filing of and mistakes in tax returns 
  • Accounts not matching industry norms (e.g., higher expenses or capital levels than the sector average) 
  • Sector that HMRC decides to focus on in that tax year 
  • Omissions and errors 
  • Years of not generating any profits 
  • Having offshore bank accounts 
  • Generating profits from a property 
when figures fluctuate significantly in tax returns, HMRC is quick to note and act

Upon receiving a tax investigation letter or phone call, taxpayers should recheck HMRC’s reasonings and not accept them by face value since they may not be accurate at all times. It’s a wise move to consult tax investigations service professionals first before agreeing to meet with HMRC. 

What Are the Types of Tax Investigations and How Long Do They Take?

Here is the HMRC tax investigation time limit and the types of investigation the tax authority performs:  

Full Enquiry 

During a full enquiry, HMRC performs a thorough review of all business’s records. This is usually done when HMRC suspects there’s a high chance of a mistake in the tax calculations. For companies with limited liability, HMRC might closely look at both the financial matters of the business and the tax affairs of its directors. In a full enquiry, HMRC focuses on cases where they believe significant errors might exist in the tax return.  

A full enquiry can last for at least a year, and in complex cases, it might extend even longer. The duration of this tax investigation depends on how extensive the tax authority’s examination is and the amount of paperwork involved. It might take a few months or even up to a year to complete. HMRC might extend the investigation further by requesting additional information. 

Aspect Enquiry 

In an aspect enquiry, HMRC examines a specific part of a business’s finances accounts and requires more detailed information. This could involve investigating inconsistencies found in a particular section of a recent tax return. Generally, the outcome of this enquiry reveals unintentional mistakes or misunderstandings rather than intentional efforts to evade taxes. 

Since this type of investigation examines only a portion of the tax return, it usually takes around 3 to 6 months. However, it’s worth noting that taxpayers should take this type of enquiry seriously, treating it with the same level of importance as a full investigation.  

Random Check 

As the name implies, random checks can occur without any warning, regardless of the state of a business’s financial records or whether any alerts have been triggered. This type of enquiry is purely based on chance. HMRC selects a sector entirely at random for investigation.  

Unfortunately, there is no set time limit for HMRC to complete a random tax check. The investigation comes to an end when HMRC makes a decision regarding the tax claim for that specific year. This could be a relatively quick process lasting a week or two, or it could stretch over several years of ongoing investigation. 

HMRC Criminal Investigation Tax Policy 

In most cases, HMRC addresses suspected fraud through a civil investigation, but they can also carry out criminal investigation under various circumstances. These include instances where there are suspicions of intentional concealment, defraud, corruption, money laundering, or the discovery of forged documents. 

When a tax investigation by HMRC reveals intentional wrongdoing by the taxpayer, the case might be escalated to a criminal status. If taxpayers receive a notification of being under investigation following Code of Practice 9, it signifies that HMRC is pursuing a criminal inquiry, and legal action is likely. 

HMRC investigates not only clear cases of fraud or criminal behaviour but also examines various innocent actions that may appear questionable until properly explained. This could include situations like having disproportionately high expenses compared to income or consistent tardiness in submitting tax returns. The extent of their investigation might also be influenced by the level of suspicion. 

Taxpayers facing suspicion of intentional tax fraud have the option to engage in HMRC’s Contractual Disclosure Facility (CDF). This allows them to admit to any deliberate misconduct related to tax within 60 days of notification. By doing so, suspected “fraudsters” can avoid criminal charges. 

When a business voluntarily discloses errors or offences, HMRC takes this into favourable consideration when deciding between a civil or criminal investigation. Criminal convictions are relatively uncommon, except for proven cases of fraud. Typically, penalties involve fines for minor offences or repayment of owed taxes.  

Naturally, the longer a tax investigation continues, the more expenses it incurs. That is why many prudent business owners opt for HMRC tax investigation insurance policies and tax experts to mitigate potential costs and expedite the investigation process. 

5 Stages of Tax Investigation

Generally, the flow of HMRC’s tax investigations is as follows: 

1. Opening Tax Investigation 

HMRC does not immediately notify individuals when their financial matters come under review. However, if HMRC decides to launch a formal investigation, they might send a letter from one of their departments requesting additional information. Normally, a tax inquiry must begin within 12 months of the deadline for the relevant tax return or 12 months after the return was actually submitted if the deadline was missed. 

2. Tax Investigation Notification

Every tax investigation begins with the arrival of a brown envelope labelled “HMRC” in the mailbox or a direct phone call from HMRC. The letter intends to solicit information from the taxpayer or their accountant. It outlines whether HMRC is focusing on a specific aspect of their tax return or conducting a comprehensive investigation of their taxes.

hmrc notifies taxpayers about upcoming tax investigations through a letter or phone call

If taxpayers disagree with HMRC’s decision or the subject of their investigation, they have the option to pursue alternative dispute resolution (ADR) at any point. This allows for an alternative means of addressing the disagreement. 

3. Submission of Required Documents 

The types of records that HMRC may ask for depend on the specific nature of their investigation. If the taxpayers’ records are stored digitally, HMRC has the authority to request access to the software system they employ, as well as a copy of their digital records. The records the tax regulations may request will include but do not limit to the following: 

  • Bank statements 
  • Credit card statements 
  • Sales invoices 
  • VAT records 
  • Payroll records 
  • Quotes from third parties 
  • Copies of emails and correspondence 
  • Chequebooks and paying slips 
  • Job quotes or pricing estimates 
  • Purchase invoices and expense receipts 

4. Interview 

HMRC often requests meetings, but these can usually be avoided. The information they seek can be provided through other means, which can be better for all parties involved.  In more serious cases, particularly those involving potential tax crimes, HMRC might ask for an interview under caution.  

In the worst situations, HMRC even holds the authority to arrest individuals. Facing an interview with HMRC, it’s recommended to have specialized legal representation from the insolvency service and tax investigation expert who can provide appropriate tax investigation advice and protection. 

5. HMRC’s Consequences  

The conclusion of a tax investigation is officially marked by either a decision notice or the agreement of a contract settlement. Once a tax return has undergone investigation, it cannot be re-examined. If taxpayers disagree with a decision, a 30-day window exists for filing appeals or complaints. 

A decision notice is typically communicated through a letter outlining the final position. It might also include a penalty notice or an assessment, providing a clear picture of the outcome. On the other hand, contract settlement is a legally binding arrangement between HMRC and the taxpayer. Here, the taxpayer agrees to make payment while HMRC agrees not to utilise its powers to recover the funds. 

The outcomes of an investigation depend on HMRC’s findings. Common scenarios include: 

  • Overpaid Tax. Taxpayer receives a refund with interest. 
  • Underpaid Tax. Taxpayer is required to settle the owed tax within 30 days, potentially with added interest. 
  • Deliberate Wrongdoing. If the investigation reveals deliberate misconduct by the taxpayer, HMRC might elevate the case to a criminal level, possibly incurring a penalty. The total proceeds of crime consider factors like reasons for underpayment, prompt error disclosure, and cooperation throughout the investigation. 

How Far Does HMRC Go Back in Tax Audit?

Type of Tax Normal Carelessness Deliberate
Capital Gains
4
6
20
Corporation Tax
4
6
20
Income Tax
4
6
20
PAYE
4
6
20
VAT
4
4
20

How far HMRC goes back in tax compliance checks depends on the reasons for taxpayers’ actions and the tax form being investigated. Here is the specific time limit according to the number of years: 

Can HMRC Tax Investigation Be Prevented?

There is no way to totally prevent HMRC’s tax enquiries, but businesses can take proactive measures to lower their likelihood of tax investigations as well as mitigate their costs.  

However, many investigations arise from situations that taxpayers are aware of. Some individuals expect HMRC to eventually inquire about certain aspects of their financial matters. These are instances where careful actions can prevent or mitigate the impact of a tax investigation. 

Getting insurance to shield their business from a tax audit or investigation expenses is a great idea. Another option is to become a member of a business association that offers this benefit. Tax investigations insurance, sometimes called fee protection insurance, covers the defence costs. 

These policies are pretty straightforward. Similar to many other types of insurance for small businesses, clients pay a regular fee—either monthly or yearly. In return, if they face a tax audit or investigation, the insurance helps cover the expenses of defending themselves. 

Seeking guidance from a specialised tax investigation expert promptly is crucial. Expert legal and insolvency counsel can provide reassurance and, more importantly, offer strategies to avert or minimise the impact of a tax investigation, such as wind up to liquidation or bankruptcy

FAQs About HMRC’s Tax Investigations

Will HMRC Require Anyone Else Other Than the Person Concerned?

HMRC investigates the person concerned first. However, according to the gravity of the case, they may also include the individual’s business partners, directors, and even family members. 

What is HMRC's Approach to Tax Fraud?

HMRC tackles tax fraud by building checks and controls into the systems. They do it through fraud disqualification schemes even before the payment is made. HMRC’s stringent approach to tax fraud is clearly evident in VAT reverse charges, for example, to prevent VAT fraud.  

Can HMRC Automatically Check Company Directors’ Data?

When HMRC carries out a tax investigation for a company, they often show interest in examining the personal tax matters of the company’s directors, especially when it is a family-operated business or has only a few directors. However, an investigation into a company’s tax affairs doesn’t automatically grant HMRC the authority to access personal information from the directors of the said company.

How Legend Financial Can Help

Tax investigations in the UK can quickly become overwhelming and burdensome. Dealing with HMRC’s inquiries, paperwork, and potential legal complexities can be a real challenge. This is where Legend Financial comes to the rescue. 

Imagine having a reliable shield against HMRC’s intricate procedures and demands. Legend Financial serves as that protective buffer, ensuring that the tax investigation process is smoother and faster. We’re here to minimise the stress on your part and trim unnecessary costs. Reach us today! 

References

Everything you need to know about HMRC tax investigations. (n.d.). Retrieved from Free Agent:https://www.freeagent.com/en/guides/
bookkeeping/hmrc-tax-investigation-survival-tips/
 

What to Expect in a HMRC Tax Investigation. (May 2016). Retrieved from Aston Shaw: https://www.astonshaw.co.uk/news/expect-hmrc-tax-investigation/ 

Facing an HMRC tax investigation. (2 March 2023). Retrieved from Unbiased: https://www.unbiased.co.uk/discover/tax-business/running-a-business/facing-a-tax-investigation 

What Happens in a HMRC Tax Investigation? (n.d.). Retrieved from DBT & Partners: https://www.dbtandpartners.co.uk/legal-articles/hmrc-tax-investigation/ 

Tax Investigations Frequently Asked Questions. (8 June 2018). Retrieved from Richard Nelson LLP: https://www.richardnelsonllp.co.uk/guides/tax-investigation-faqs/ 

HMRC Tax Investigation: What you need to know. (14 February 2022). Retrieved from THP: https://www.thp.co.uk/hmrc-tax-investigation/ 

Tax investigation – what you need to know. (n.d.). Retrieved from Money Donut: https://www.moneydonut.co.uk/tax/tax-problems-and-investigations/tax-investigation-what-you-need-to-know 

PERSONAL TAX INVESTIGATION. (n.d.). Retrieved from WLH Tax: https://www.wlhtax.co.uk/services/personal-tax-investigation/ 

Top questions about HMRC tax investigations. (n.d.). Retrieved from Buzzacott: https://www.buzzacott.co.uk/top-questions-about-hmrc-tax-investigations 

Tax compliance checks. (n.d.). Retrieved from Gov.UK: https://www.gov.uk/tax-compliance-checks 

Imagine having a reliable shield against HMRC’s intricate procedures and demands. Legend Financial serves as that protective buffer, ensuring that the tax investigation process is smoother and faster. We’re here to minimise the stress on your part and trim unnecessary costs. Reach us today! 

Author

  • Faizan Rashid

    Faizan is a well-qualified accountant with a firm belief in a team environment, working to deadlines, is usually absolute as tax return deadlines are non-negotiable. He is highly regarded and the most experienced professional of Legend Financial.

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Faizan Rashid
Faizan is a well-qualified accountant with a firm belief in a team environment, working to deadlines, is usually absolute as tax return deadlines are non-negotiable. He is highly regarded and the most experienced professional of Legend Financial.

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