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What should advisers do when their clients are enquired into by HMRC?

By admin
01 Oct 2015
Tax Investigation

An accountant, solicitor or financial adviser may be the first point of contact when a client receives an enquiry from HMRC. That enquiry may seem routine and an adviser may be confident that there are no irregularities. However, a moment should be taken to consider how HMRC identify taxpayers to enquire into as well what an adviser can do to best manage that enquiry. We reflect on measures advisers can take to ensure they provide the best service and protection for their clients. We assume that correspondence has been received which may include:

  1. A request to:
    1. Review PAYE records
    2. Check the accuracy of a VAT return
  2. An enquiry open into a self-assessment whether corporate or personal
  3. A general approach to understand a person’s tax affairs more fully or understand a business

The first and most protective step an adviser can take is to assume the request is NOT routine.

The second step should be to spend a little time identifying risks.

The third would be to plan how to manage HMRC’s request.

Routine or not

The information available to HMRC is phenomenal. It includes information from lots of government departments including (but not limited to):

  • Companies House records being accounts, movement and issue of shares, certain resolutions and the ability to connect one or more entities beneficially owned by the same persons
  • Land registry, electoral role, council tax, business rates and planning permission
  • Licenses
  • VAT, corporate tax returns, employer returns and personal tax returns
  • Import and exports
  • Information from third parties being financial institutions, property management agents, digital wallets and internet payment facilitators, and insurance companies to name a few (there are sixteen broad categories that HMRC can request information from without a taxpayer knowing)
  • Border agency records
  • Information passed from overseas jurisdictions either under existing double taxation agreements or the soon active intra government agreements
  • Court rulings whether commercial or personal (for example those arising in the event of divorce etc.) and just in case that was not invasive enough
  • Social media records are potentially accessible too

HMRC is, unfortunately, a commercial organisation with the responsibility of ensuring tax compliance. It has award winning software with which HMRC’s Risk and Intelligence Unit uses to identify potential irregularities which are then passed to officers to select their method of approach to identify if there are in fact irregularities.

Sorry, enquiries are no longer simply random. That is not to say there are tax irregularities although it is more likely there are. This reality requires a new approach when handling HMRC enquiries or so called “routine” visits.

Identifying risks

It is imperative that an adviser either by themselves or with specialist assistance consider what the risks are. To do so fully, requires a little snooping and applying an objective view.

An adviser should consider reviewing the following, say three to six years:

  1. Tax returns submitted
  2. Accounts of all entities associated with the individual
  3. Movement of assets including shares and property
  4. Whether tax planning has been undertaken
  5. Whether a tax scheme has been utilised (over the past fifteen years)
  6. Press coverage and/or information on social media sites (although this in itself will not result in an enquiry)

General areas of risk include:

  • Cash receipts
  • Transfer of assets
  • Tax favoured investments
  • Pension planning
  • Profit extraction
  • Eligibility of entrepreneur’s relief
  • Property income and gains
  • Remuneration planning
  • Trading and not declaring (including internet traders)
  • Transactions with connected persons
  • Under declared income for VAT/Corporation tax
  • Over stated expenses for VAT/corporation tax
  • Incorrect operation of PAYE on payments to directors or those regarded as self employed
  • Incorrect operation of PAYE on benefits in kind and/or salary sacrifice arrangements
  • Incorrect treatment of expenses: capital and revenue/allowable or disallowable
  • Share transactions
  • Incentive planning
  • Non or incorrect payment of S455
  • Reorganisation
  • Capital allowance claims
  • Profit extraction
  • Transfer pricing

Managing HMRC’s request

HMRC don’t simply directly request a specific area to be considered, instead they collate evidence which may generally indicate the direction of their queries although often goes missed. A HMRC request if considered carefully can:

  • Let you know what they are really interested in
  • Permit a client to make a proactive disclosure and mitigate penalties

A request may be for information or for a meeting/visit.

Where the request is for information, it is essential to establish:

  • The time given to respond
  • Whether HMRC is entitled to the information
  • Could the information relate to establishing a tax irregularity and if so what area

It may seem obvious, although far too often consideration is not given to how long a response may take and advisers and clients find themselves rushing to meet a deadline. HMRC will generally request a response within 30 days although this period is the minimum requirement. There may be good grounds why the timescale cannot be met including the availability of persons, the amount of information requested and the time it will take to review and compile the information. HMRC will generally extend the period although they will not be content if a deadline is not met.

There is a fine line in being cooperative and providing all information or providing that which HMRC are entitled to or that which is necessary to answer the question. For example:

  • HMRC may request personal bank statements of a shareholder/director whilst looking at a company’s tax affairs. Is this appropriate? Where the personal bank account is used to meet expenses of the business and/or the business account used to meet personal expenses then HMRC may have grounds to request.
  • The bank statements of a business may be requested to evidence a particular expense – would it not be simpler to provide a receipt and one statement as opposed to all?
  • Statements (or other information) may be asked for the current accounting year or prior ones that are not within the enquiry window.

Establishing what the line of questioning relates to requires exploring what the information could be used for other than what it appears to be requested for. For example, personal bank statements may show other sources of income or regular amounts paid by a company that appear to be salary and not a dividend. Another example may be verifying the VAT return and considering entertainment expenditure and comparing it against the amount disallowed in the corporation tax computation. The adviser might wish to reconcile return figures ahead of communicating with HMRC!

HMRC may stipulate that they wish to look at evidencing the sales figure although they may also ask for stock count information at year start/end and damages. Sales figures could be reconciled with VAT returns although the discrepancies between VAT reclaimed and paid may identify potential cash sales.

If a visit is proposed, we would strongly request you consider our article Considerations for Meetings pt 1 and pt 2.

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