What is a HMRC tax enquiry?
HMRC Investigations are something most of us will hopefully never face. When you complete and submit your self-assessment tax return by the 31st January every year, HMRC immediately processes your tax return and makes basic checks to ensure the accuracy of the calculations. HMRC now have a powerful and advanced computer system and software that does this for them. And with the push to digitisation and HMRC’s making tax digital initiative, they are becoming more efficient and can get access to information about you and your financial affairs from many different sources.
Unless you hear otherwise from HMRC, you will pay any outstanding liability based on the figures shown in your self-assessment return. This is what is known as “process now, check later”.
To encourage compliance and honesty, HMRC’s extensive enquiry powers are an essential element of the self-assessment system.
The Taxes Management Act gives HMRC the right to enquire into personal and trustee tax returns.
This right applies to the original tax return, and to any subsequent amendment to the return made by the taxpayer and it applies in all cases.
The term “enquiry” does not have a statutory definition, and therefore carries its normal, dictionary definition. In their Enquiry Manual paragraph EM0091, HMRC put forward the definition as “seeking information, asking, questioning”. Consequently, anything beyond a correction of an obvious error or omission is treated as an enquiry, and must be dealt with by way of a formal “notice of enquiry” which you would receive in the post.
What normally prompts an enquiry?
The vast majority of enquiries begin because HMRC suspect that there is something wrong with your self-assessment tax return, as detected by their advanced computer system and network. In other words, there is either something on the face of the return that gives cause for concern, or HMRC have information from other sources that conflicts with what is shown on the return.
Nudge letters are often used by HMRC to prompt taxpayers to recheck an entry, or the lack of an entry, on a self-assessment return in a particular area. Nudge letters are not an enquiry in itself, but if you don’t deal with the requests or information on a nudge letter, the chances are HMRC will open a formal enquiry into your tax return.
There is what is known as an enquiry window, which is basically a time limit HMRC have to open a formal enquiry. Let’s suppose you complete your 2019-20 self-assessment tax return and submit it on the 31st January 2021, the deadline date. Assuming HMRC receive the return on the same date, then under the Taxes Management Act, they will have up to 12 months from this date to open an enquiry.
There are circumstances where HMRC can open what is called a discovery assessment beyond this 12 month enquiry window, but we’ll cover that in a later blog.
There are 3 types of enquiries HMRC can open, namely a full enquiry, an aspect enquiry or a random enquiry, explored as follows:
An aspect enquiry relates to one or selected specific entries in your return. As long as its handled well and honestly, an aspect enquiry is often swift and to the point.
Random enquiries still happen. HMRC will select a number of random returns, not based on any risk, and are primarily designed to ensure their enquiry system is working well and to send out a message that they do check self-assessment returns.
A full enquiry goes deeper, and it is where HMRC seek to enquire into every aspect of your self-assessment return and to also test your overall financial affairs. This is often referred to as HMRC investigations.
HMRC’s EM0091 manual provides more detail on how they approach an enquiry.
Ordinarily, a HMRC enquiry should be nothing to worry about so long as you follow the steps in the next section.
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3 simple steps to reduce the risk of HMRC investigations
There are a number of steps and checks you can make to significantly reduce the event of any type of HMRC enquiry, but these are 3 we recommend you focus on:
1) Get your self-assessment tax return drafted as early as possible as so you or your accountant gets time to objectively review the return. Don’t forget from the 6th April to the 31st January you have almost 9 months to prepare, complete and submit your return, so there is plenty of time.
If something looks odd when you step back, then it gives you a chance to iron out any accidental and non-deliberate errors or omissions before submission as so you are exercising ‘reasonable care’. Honest mistakes do happen and HMRC do understand this, but you want to reduce the chances of an enquiry in the first place so therefore, take a little extra time and thus care.
2) Use supplementary notes where appropriate. In your self-assessment return, HMRC provide boxes to add supplementary notes, optionally. You can add text to provide additional useful information and explanations that can provide HMRC with clarity and reduce any misinterpretation or misjudgement of your numbers that their computers could throw up. This is particularly useful if your affairs are somewhat more complex, for example you have capital gains, overseas income or other complexities.
3) Last but not least, be honest and don’t deliberately misstate, fabricate or conceal material numbers just to save a bit of tax. Yes, there is a moral argument as to why some rich individuals and large organisations perhaps don’t pay their fair share of taxes, but for most of us ordinary folk this is something we cannot directly control so therefore its wise not to let this skew your judgment and legal obligation with your own tax affairs.
If HMRC do launch an enquiry and dig deeper, their tax officers are trained to unearth such intent through their questioning, and this could lead to a full on enquiry or HMRC investigations,and will mean your time and energy diverted away from your job, business and family, anxiety and quite frankly, a heap of issues, not to mention potential heavy penalties, interest on underpaid tax and in the absolute worse case scenario, criminal proceedings against you. You’d rather sleep well at night with a clear conscience so you have the right mental energy to do what you do best.
On a final note, the law does allow taxpayers to organise their financial affairs in such a way as to minimise their liability to tax. This is known as tax avoidance, which, whilst acting in within the strict letter of the law, is completely legal. Tax evasion, however, is strictly illegal, and HMRC have great powers to ensure that people acting outside the law face the consequences for their actions. There is often a fine line and several shades of grey between tax avoidance and tax evasion. And finally, HMRC investigations are becoming more frequent due to HMRC’s advanced systems and software that are now doing much of the heavy lifting for them, in identifying anomolies and unusual patterns in a certain number of tax returns.
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Tony Dhanjal
As a Qualified Accountant, I have been supporting and serving SME's, freelancer and entrepreneurs over 25 years. I am passionate about helping and empowering you to KNOW YOUR NUMBERS so you can manage and grow your business or personal finances to success.
