HMRC Tax Investigations: What To Expect

Tax audits and tax inspections can be complex and extremely stressful, and unless you are sure of your position, you may benefit from professional advice as soon as a tax investigation begins.

In this article, we aim to provide a clear understanding of what triggers these investigations, what to expect during the process, and effective strategies for managing them. This guide is an essential tool for anyone looking to navigate the complexities of tax compliance and HMRC’s enforcement tactics with confidence.

What is an HMRC Investigation?

An HMRC tax investigation is a process initiated by Her Majesty’s Revenue & Customs (HMRC) in the United Kingdom to ensure that individuals and businesses comply with tax laws and accurately report their financial affairs. These investigations can vary in scope and complexity, ranging from simple checks of a specific element of a tax return to more comprehensive enquiries that review the entirety of an individual’s or business’s financial records.

The purpose of these investigations is to uncover inaccuracies, whether intentional (such as tax evasion) or unintentional (like errors in calculation), and to ensure the correct amount of tax is paid. They can be triggered by various factors, such as discrepancies in filed returns, significant changes in income or expenses, random selection, or information from third-party sources.

During an investigation, HMRC may request additional documentation, ask detailed questions, and in more serious cases, conduct in-depth audits. It’s crucial for those being investigated to understand their rights and responsibilities, and often advisable to seek professional advice to navigate the process effectively. Compliance is key, and the outcomes can range from no action, if compliance is confirmed, to penalties or legal action in cases of serious non-compliance.

How do you know if HMRC is Investigating you?

Typically, you will only become aware of an HMRC investigation when you receive an official notification. This correspondence, usually sent to your business address, will explicitly detail the nature of the inquiry and the specific aspects of your tax affairs under scrutiny. The letter will also indicate which department of HMRC is conducting the investigation, providing a clear point of contact for your subsequent communications. This formal notification is your first definitive indication of an HMRC investigation.

3 Types of HMRC Investigation

When HM Revenue & Customs (HMRC) conducts tax investigations, they employ various types of enquiries tailored to specific circumstances. Each type of investigation has its own focus, ranging from a detailed examination of the entire tax return to a more targeted look at specific elements. Understanding these categories is key to effectively preparing for and responding to any scrutiny from HMRC.

Full Enquiry

A Full Enquiry is the most comprehensive form of investigation by HMRC. It involves a detailed examination of the entire tax return, scrutinising all sources of income and expenditure. This type of enquiry is typically initiated when HMRC suspects significant discrepancies or potential tax avoidance.

Aspect Enquiry

An Aspect Enquiry is narrower in scope, focusing on particular aspects or sections of a tax return. This might involve checking specific transactions or claims that appear unusual or inconsistent. It is less intrusive than a Full Enquiry but still requires thorough documentation and explanation of the queried items.

Random Checks

HMRC occasionally conducts Random Checks. These are not necessarily triggered by any specific suspicion of wrongdoing but are used to maintain the integrity of the tax system. They can be either full or aspect enquiries but are selected randomly.

Why are HMRC Investigating My Company?

There are several reasons why your company might attract the attention of HMRC for a tax investigation. Being aware of these triggers can help you take proactive steps to ensure compliance and potentially avoid the scrutiny of HMRC. Common reasons for investigations include:

• Errors on Tax Returns: Mistakes or inconsistencies on your tax returns can raise red flags, prompting HMRC to investigate further.
• Late Filing or Payment: Submitting tax returns or making tax payments after the deadline can attract unwanted attention from HMRC.
• Unusually High Expenses: Expenses that appear excessive compared to industry norms can lead HMRC to question their validity.
• Inconsistencies in Tax Returns: If figures on your tax returns fluctuate significantly without a plausible explanation, HMRC may investigate the reasons behind these inconsistencies.
• Operating in a High-Risk Industry: Certain industries are considered higher risk for tax evasion, and businesses in these sectors may face more frequent scrutiny.
• Tip-offs to HMRC: Information received from external sources can also trigger an investigation into your company’s tax affairs.

What Happens if You Get Investigated by HMRC?

If HMRC decides to investigate your tax affairs, they will initiate the process by contacting you, typically via a letter or a phone call. This communication will outline the specifics of the investigation, detailing the areas of your tax records they intend to examine. The initial step usually involves an ‘information notice’ requesting specific documents or information.

During a tax audit, an inspector might plan a visit to review your tax records in person. The scope of the investigation can vary, potentially including:

• Your self-assessment tax return.
• The company tax return.
• PAYE records and returns.
• Accounts and tax calculations.

Tax Penalties

Non-compliance during an investigation, such as failing to respond to information requests or refusing a visit, can result in penalties. The duration of a tax investigation can span several months or more and may broaden to encompass different areas of your tax affairs. For instance, a probe initially focusing on corporation tax might extend to include the personal tax details of company directors.

What are the stages of an HMRC investigation?

An HMRC investigation can be a stressful and daunting experience. However, understanding the stages involved and taking proactive steps can help you navigate the process effectively and protect your interests.

Stage 1: Notification

The investigation commences with HMRC informing you, typically through a written notice, that they intend to examine your tax affairs. This notification will clearly outline the scope of the investigation, specifying whether it’s a full enquiry encompassing your entire tax history, an aspect enquiry focusing on a particular aspect of your tax return, or a random check conducted as part of their routine compliance procedures.

Stage 2: Information Gathering

HMRC will request specific information and documentation relevant to the investigation. This may include tax returns, accounts, financial statements, invoices, receipts, and other records related to your income, expenses, and business transactions. It’s crucial to provide the requested information accurately and promptly to facilitate a smooth and efficient investigation process.

Stage 3: Meeting (Optional)

In some cases, HMRC may request a face-to-face meeting to clarify any questions or concerns they have regarding your tax affairs. This meeting provides an opportunity for you to provide explanations, address any discrepancies, and present any supporting evidence that may strengthen your position.

Stage 4: Review and Analysis

HMRC will thoroughly review and analyze the information and documentation you have provided. They may ask further questions or request additional documentation as they scrutinize the details of your tax affairs. This meticulous review ensures that they gain a comprehensive understanding of your tax situation and identify any potential areas of noncompliance.

Stage 5: Conclusion and Findings

Once HMRC has completed their review, they will provide their findings. If they find everything in order, the investigation will be concluded without any further action. However, if discrepancies are found, they may require you to pay the owed tax, plus interest and possibly penalties.

Stage 6: Resolution and Corrective Action

The final stage involves resolving any issues that have been identified during the investigation. This could involve negotiating a settlement if you owe tax or implementing corrective measures to ensure future tax compliance. In cases of serious tax evasion, it might lead to legal action.

Stage 7: Appeal (Optional)

If you disagree with HMRC’s findings, you have the right to appeal their decision. The appeal process can involve several steps, including a tribunal hearing where you can present your case and seek an independent review of HMRC’s findings.

Remember, cooperation, transparency, and the assistance of a qualified tax advisor can significantly enhance your chances of a favorable outcome.

How far back do HMRC investigate?

The time frames for different types of errors are as follows:

• Innocent Errors: If the errors on your tax returns are deemed to be innocent or unintentional, HMRC can investigate up to 4 years back from the end of the tax year in question.
• Careless Errors: In instances where the errors are considered careless but not deliberate, HMRC can extend its investigations to 6 years from the end of the relevant tax year.
• Deliberate Tax Evasion: For cases of deliberate tax evasion, where there is intent to mislead or conceal information, HMRC has the authority to investigate as far back as 20 years.

Type	Normal Behaviour (Years)	Careless Behaviour (Years)	Deliberate Behaviour (Years)
Capital Gains	4	6	20
Corporation Tax	4	6	20
Income Tax	4	6	20
PAYE	4	6	20
VAT	4	4	20

How can we help?

If you’re struggling to make HMRC payments, or want help dealing with HMRC threats regarding VAT, PAYE, self assessment or corporation tax problems, we can help. Please call us on 0800 074 6757, email: info@companydebt.com, or use the live support feature on our website.

Frequently Asked Questions About HMRC Investigations