HMRC enquiries – Opening an Enquiry…
Before undertaking an enquiry or discovery assessment the taxpayer must be notified in writing of its intention to enquire into their tax return.
Generally, HMRC have 12 months from the date of filing the tax return to open an enquiry. If an enquiry is not made into a tax return within 12 months, it is treated as final.
HMRC may also occasionally undertake more informal checks of information in the first instance rather than opening a formal enquiry.
Extended Time Limits/ Discovery Assessments…
Despite the 12-month time limit to open an enquiry, HMRC can raise a discovery assessment beyond the 12-month limit in the following circumstances:
• Up to 4-years from the filing date, if there is a loss of tax as a result of an incomplete return/disclosure;
• Up to 6-years from the filing date if it involves a loss of tax as a result of a careless error;
• Up to 20-years from the filing date if there is a loss of tax as a result of deliberate conduct.
To raise a discovery assessment, the onus is on HMRC to prove that there has been an incomplete disclosure or a loss of tax.
Concluding an Enquiry
Once an enquiry or assessment has been opened, there is no time limit in relation to how long it may stay open.
However, once open there are two ways to conclude an open enquiry, a partial closure notice, which closes an element of the overall enquiry or assessment, and a final closure notice, which closes the whole of an enquiry or assessment.
During an open enquiry or assessment, if HMRC conclude that there are no inaccuracies with a tax return, they must issue a closure notice.
HMRC must issue a closure notice when there is no further information needed to determine whether the return is correct and complete or to quantify any errors or omissions.
Consequently, HMRC cannot speculatively undertake a ‘fishing exercise’ in the hope of uncovering something.
If the taxpayer feels that HMRC is failing to issue a closure notice when it should, a taxpayer may apply to the First Tier Tribunal for a closure notice. In this case, the onus is on HMRC to convince the Tribunal that there are reasonable grounds to continue the enquiry or assessment. If HMRC fails to convince the Tribunal that it should keep the enquiry or assessment open, the Tribunal will direct that the closure notice is issued within a specified timeframe. However, even if a taxpayer is successful in being granted a closure notice at the Tribunal, this may not necessarily benefit the taxpayer, as HMRC will issue a closure notice based on its current conclusions in respect the enquiry to date.
Managing an Enquiry
The best approach for the taxpayer is to convince HMRC their tax returns are correct.
Failing that, reaching a resolution with HMRC on the issue will be the next best option, as this will clarify the tax position for the taxpayer and permit them to agree settlement. Following this, HMRC may either issue a closure notice reflecting the agreed settlement, or if matters cannot be resolved, as above HMRC will issue a closure notice reflecting their own conclusions.
When HMRC issue a closure notice, any amendments to the taxpayer’s returns will be final, subject to the taxpayer appealing. Any tax owed to HMRC, or repayable to the taxpayer will be due and payable within 30 days.
If HMRC have made an amendment, having raised an enquiry or assessment, a penalty may apply. Penalties are calculated considering a number of factors including the behaviour giving rise to the error made, and the quality of cooperation provided to HMRC.
Once the closure notice is issued, if the taxpayer is dissatisfied with the outcome, they will have 30 days to notify HMRC in writing of their notice of appeal.