When the self-assessment system was first introduced, it was done on the basis that there would be a random selection of returns each year that would be enquired into:
“We may enquire into a tax return, a claim made outside a return, or an amendment (a change you make to your tax return, or to a claim), in order to make sure they are right and that people pay the right amount of tax. Some enquiries are selected at random and some are selected because we think the information put on the return looks wrong or because we do not understand it. We cannot say why we have selected it.”
HMRC’s approach and method for selecting has been refined. Nowadays, a sophisticated automated analysis is used to identify higher risks or tax irregularities. The information at HMRC’s finger tips is significant and it is resourcefully analysed by their award winning software systems ahead of an officer or inspector considering opening an enquiry. In simple terms, a considerable amount of analysis has been undertaken before an enquiry is opened and it is likely that a reason has been identified why it should be opened.
Enquiries: practical points
When HMRC issue a letter opening an enquiry it will specify records and information desired and may seek clarification on specific points. Where all or considerable business records are desired, the enquiry will be a full enquiry. Enquiries can often be a prelude to more serious investigations and where there is concern over tax affairs generally, it would be prudent to consider seeking specialist advice for an independent opinion. We offer a no obligation service to discuss such enquiries with our network of professionals.
Once an enquiry is opened, HMRC may, through correspondence, request information and they may suggest a meeting to discuss tax matters or suggest attending say a business premise. All of these requests should be managed:
Information should not simply be passed to HMRC, without full consideration of the impact of providing it. A pre submission review should be undertaken to ascertain whether there are identifiable tax irregularities or to identify where HMRC line of enquiries will go.
Where a meeting is suggested, it indicates HMRC see that meeting as having a commercial benefit. HMRC guidance to inspectors states:
“Often a meeting is a good way of breaking the deadlock but bear in mind that holding a meeting can be expensive and involve a lot of time so you need to be clear what you expect to achieve. You should always prepare thoroughly for a meeting and if there are technical issues to discuss you should consult TG [technical guidance team] before the meeting and, if the technical input is substantial, someone from TG will be expected to attend the meeting and take the lead on that particular aspect. But in any case at least two members of HMRC should be present at any meeting.”
HMRC’s internal guidance indicates that:
The officer desiring a meeting needs to consider the commercial benefit
Full preparation should be made including technical analysis
The officer should consider who else should be in attendance
Holding a meeting at a business premise may cause undue disturbance to the business and may also be an opportunity for HMRC to seek access to business records which have not been fully considered. The suggestion of or actual meeting needs to be carefully considered and managed (giving consideration also to the powers under Part 2 Schedule 36 Finance Act 2008.
Where HMRC carry out enquiries and review records, they set out discrepancies and the additional tax (interest and penalties). In certain situations it may be more appropriate for an adviser to consider the areas where HMRC have concerns, review and present their analysis of any tax irregularities. This may result in a more beneficial approach as HMRC will often seek to quantify liabilities based on assumptions/estimations and extrapolation. Where the tax liability identified by HMRC is disagreeable, the onus of proof to establish otherwise lies with the taxpayer, which is likely to require specialist support and advice.
The enquiry process is intended to result in a settlement of arrears of tax, interest and penalties. HMRC can charge a penalty of up to 100% of the tax due (or higher if it involves something offshore). The penalty can be mitigated based on the level of disclosure, co-operation given and the seriousness of the irregularities. Whilst a penalty of 100% is technically achievable, HMRC set out specific guidance on the calculation of penalties and in most enquiry cases the penalty will be much lower if correctly managed.
Where a settlement cannot be agreed, alternative course of action can be considered including dispute resolution (appointment of a mediator) or proceeding to tribunal.
Read our article for more information on meetings with HMRC.
You can read more about managing enquires here.
Enquiries: Procedures and operation
Correcting a return
An officer of HMRC can, within 9 months of receiving a return, amend it without opening an enquiry into the return in order to correct:
An obvious error or omission
Anything else that the officer has reason to believe is incorrect based on information already held and where no more information is needed
These sorts of amendments would normally relate to wrongly stated interest, dividends, salary and tax paid (PAYE). However, it illustrates that HMRC’s software manages a great deal of information and matches it up. There are a lot more sources of information and connections made between people, entities and transactions.
Opening an enquiry
The statute allows HMRC to open an enquiry into the whole return, or only into the amendment to a return when the rest of the return is final, or into a claim not included in a return.
The legislation permitting an enquiry is as follows:
|Individuals and Trusts||S9A Taxes Management Act 1970|
|Partnership||S12AC Taxes Management Act 1970|
|Companies||Paragraph 24 Schedule 18 Finance Act 1998|
The legislation permitting an amendment to the return is:
|Individuals and Trusts||S9A(5) Taxes Management Act 1970|
|Partnership||S12AC(5) Taxes Management Act 1970|
|Companies||Paragraph 25(2) Schedule 18 Finance Act 1998|
When an opening enquiry letter is received, consider the following:
Consider approaching a specialist for an independent view on the request – remember we offer a no obligation service to our professional network and a second professional opinion can only be useful
The position should be discussed with the client to determine whether there are any tax irregularities and what approach is suitable i.e. a disclosure or simple amendment of a tax return
Check whether it has been correctly opened with the formal notice
It may be appropriate to request an officer to issue an enquiry where they have sent a letter requesting information without a formal notice
It may also be beneficial to request an enquiry to be opened where questions are asked about director’s personal tax affairs where the enquiry is into the company’s tax affairs
HMRC guidance sets out that if an officer is opening an enquiry, the Risk Team will provide with a Standard Information Package containing sufficient information to address the risk(s) identified
From 1 April 2008, when a return is received on, or before, the relevant filing deadline, the enquiry window will run for 12 months from the date the return is received.
If a return is delivered after the fixed filing date, the enquiry window is extended. The enquiry window in these cases will not close until the next quarter day, following the first anniversary of the day on which the return was received.
A taxpayer can make an amendment up to 12 months from the filing date. The amendment does not change the enquiry period for the return.
There is however a separate enquiry window for the amendment which is up to the quarter day following the anniversary of the date the amendment was made.
Enquiry window expired
An enquiry cannot be opened into a return or amendment to the return if there has already been an enquiry into either the return or amendment or the window has expired. If there is an enquiry into a return and then a subsequent amendment is made, an enquiry can be made into that amendment.
The officer may still be able to make a discovery assessment.