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HMRC Tax Investigation – What You Need to Know

If you’re facing an HMRC tax investigation – what do you do next?

HMRC have a wide range of powers that they can call upon to check that individuals and businesses have complied with their tax obligations.  These range from informal checks through to full-on tax investigations.

HMRC may open enquiries to check the accuracy of a tax return that has been filed, subject to certain time limits. Tax investigations, run by HMRC’s ‘elite’ Fraud Investigation Service, are more serious and, where fraud is suspected, can extend to a review of a taxpayer’s affairs for the previous 20 years.

The first you will know about an HMRC tax investigation is when the Fraud Investigation Service contacts you by letter.  The investigation will either be under HMRC’s Code of Practice 8 (“COP8”) or Code of Practice 9 (“COP9”).

The first applies where HMRC suspects there has been a substantial loss of tax because of tax avoidance but does not suspect fraud. The latter covers instances where fraud is suspected.

Both are serious, and where an investigation is first opened under COP8, should HMRC uncover evidence that leads it to suspect fraud, it could choose to move the investigation into COP9.

Under COP9, HMRC undertakes its investigations with a view to securing the payment of tax, interest and penalties. Such a tax investigation is, however, underpinned by the threat of criminal prosecution should you fail to cooperate or provide false information or false documents. Any tax investigation should therefore be treated extremely seriously.

How likely are you to be subject to an HMRC tax investigation?

HMRC has various ways of selecting individual taxpayers and businesses for scrutiny. Factors that could make an enquiry or investigation more likely include:

  • You file tax returns late, pay tax late or make errors that need correction.
  • There are inconsistencies or substantial variations between different returns, such as a large fall in income or increase in costs.
  • Your costs are abnormally high for businesses in your industry.
  • You have offshore bank accounts.
  • You have income from property.
  • You operate in a high-risk industry, such as businesses that routinely take cash payments, or an industry that HMRC has decided to target.
  • Your tax returns are inconsistent with how busy your business actually is or your standard of living.
  • HMRC receives a tip-off.

What HMRC can find out about you during a tax investigation

HMRC’s Connect database is designed to crawl through previously unconnected records, identifying a taxpayer’s footprint across all areas of tax, as well as records outside HMRC such as those held by the Land Registry and elsewhere.

Additionally, with the introduction of the Common Reporting Standard, and other international reporting requirements, the world truly has become a small place for hiding money. Now some of the things that HMRC can find out about you are:

  • Land Registry records – to determine properties purchased, and stamp duty paid.
  • DVLA – details of cars purchased and owned by individuals.
  • UK and overseas bank accounts – with HMRC receiving information from banks in more than 60 countries.
  • Internal tax documents – systems showing tax paid, relevant VAT registration, previous tax investigations, your previous years’ tax returns (or absence of them).
  • Earnings from any employer, including those you have worked for casually, or on an ad-hoc basis.
  • Online marketplaces – websites such as eBay and Amazon can be accessed to identify regular traders.
  • Social media – the Connect system can also look at public social media account information, including from Twitter, Facebook and Instagram.
  • UK border information showing you leaving and returning via UK airports.

Even where HMRC does not hold information itself, the Fraud Investigation Service has the ability to use “information notices” to force you and third parties to provide that information.

What to do if faced with an HMRC tax investigation?

It’s understandable that, when notified by HMRC that you are being investigated, you will no doubt be worried. At first, you may not even be sure why you are being investigated, and it could be that there has been an error on their part or a minor mistake on yours.

Regardless of the reason to help you get through the process as smoothly as possible and to avoid escalating things further, here are 10 steps on what to do when faced with an HMRC tax investigation:

  1. Keep calm The initial reactions to being notified of an HMRC tax investigation range from worry, to fear, to anger or to frustration. Despite this, the best thing you can do is keep a level head. Do not let your emotions get the best of you.
  2. Seek professional advice at the outset Seek professional advice from a tax adviser with expertise in dealing with HMRC investigations. Even if you feel like you’ve done nothing wrong and are worried about the costs of speaking to a tax adviser, the price you pay now could save you a lot of money in the long run and, by dealing with HMRC on your behalf, could help you to get on with your life and business while the investigation runs its course.
  3. Be prepared ‘Fail to prepare, prepare to fail’. This saying is particularly relevant here and hiring a reputable tax adviser is invaluable. They have the know-how to understand exactly what HMRC will want to see and, when reviewing your financial records, will be able to spot anomalies that HMRC will want to discuss.
  4. Do not lie to HMRC This point should go without saying but it is worth making note of the possible severity of the situation. If you lie during your HMRC tax investigation, then it’s likely two things will then occur. Firstly, they will eventually spot your lie, and secondly, you will be subject to much higher penalties if they are found to be due. Lying, providing false statements and documents could even result in a criminal prosecution and a prison sentence.
  5. Only discuss the investigation with your tax adviser Many people, when faced with an investigation, get frustrated and angry and start complaining to friends and relatives. This is not the way to go about things as it can lead to a multitude of different problems. You never know who may be listening and information about the case could find it way to customers, suppliers or competitors.
  6. Do not destroy anything Just as harmful as having fraudulent financial records is having no records at all. When faced with questions facing your finances, failing to have the right documentation will ring alarm bells in the mind of any HMRC investigator.
  7. Assume that HMRC knows everything The worst thing you can do is try to play the investigators by twisting evidence or preparing excuses. If you are proved to be lying at any stage during your HMRC tax investigation, you risk the tax investigation escalating to a criminal investigation. If you know you are guilty of something, then assume HMRC will eventually get to the truth. By cooperating you will ensure that the investigation remains within the civil arena and will be resolved more quickly.
  8. Make payments on account A HMRC tax investigation has the potential to go on for a long time so it may be worth making payments as quickly as possible. This will diminish any total amounts you owe which, in the future will both decrease any interest owed on outstanding payments and possibly lead to a more lenient settlement. Making these payments shows a willingness to cooperate and to get the matter resolved as quickly as possible.
  9. Seek mediation It is sometimes the case that both parties in a dispute become entrenched in their positions and little progress occurs. This drags the whole situation out for many more months than necessary and can lead to a costly hearing at the tax tribunal. If you believe this is the case, you can seek mediation or ADR (alternative dispute resolution). This may mean paying out a larger sum than you’d like but it could put an end to the whole proceedings much faster.
  10. Move on, learn and be compliant Once the investigation is over and you have dealt with the settlements, you can then move forward by ensuring that you remain tax compliant and arranging for compliance checks with your tax adviser from time to time.

Do you need help with an HMRC tax investigation? 

Does the brown envelope send shivers down your spine? Enterprise Tax has a team of professionals who can help you go through an HMRC tax investigation smoothly and successfully. Please contact us should you need our assistance. We will discuss your concerns and issues, take control of the situation and plan the way forward.

For more information, please contact one of our chartered tax advisers.

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