HMRC Investigations – Mind the Gap

Each year, HMRC release statistics relating to the ‘tax gap’ (the difference between the amount of tax which HMRC believe to be due and the amount actually collected). This difference is currently estimated at £33 billion.

Two of the primary reasons for this difference are errors in returns (both innocent errors and failures to take reasonable care) and tax avoidance.  

Tackling ‘tax avoidance’ and the ‘hidden economy’ has been a common budget theme over the past few years, with HMRC determined to close the gap as far as possible. This has resulted in a several billion pound investment since 2010 on a combination of new digital tools and further compliance staff.  Due to these technological advancements, information from a variety of sources can now be cross checked and inaccuracies/omissions easily identified.  

In addition to risk based enquiries, some taxpayers can be unlucky enough to be selected for a random compliance check. In either case, dealing with such an investigation can be time consuming and costly.

Typically smaller businesses and individuals will have limited financial resources to defend against such an enquiry and therefore can be perceived as an ‘easy target’ by HMRC.

With this in mind, I have included 5 top tips for dealing with an investigation:

1. Check the enquiry is in time – The length of time HMRC have in order to open an enquiry into a particular tax return is governed by the legislation. Therefore the starting point for any investigation should be to ensure the enquiry notice has been received within the permitted time.
2. Respond in a timely manner – The letter from HMRC should state a date by which they would like to receive the requested information. Every effort should be made to meet this deadline or if it is not possible, a new deadline should be agreed with the inspector. Ignoring the letter will not make the investigation go away but could mean that an assessment for tax is issued based on the information already held by HMRC.
3. Keep detailed records – Generally business records must be retained for a minimum period of six years. In the absence of detailed records it can be very difficult to justify the figures included on the tax return.
4. Fee investigation insurance – It is a good idea to consider fee investigation insurance at an early stage. If you are subject to an enquiry that is covered by your policy, any accountancy fees for defending the enquiry incurred up to the policy limit will be covered.
5. Speak to your accountant – Lastly but most importantly, speak to your accountant as soon as possible!

If you are subject to an investigation by HMRC and would like some advice, please contact your local Perrys branch.