Tax Investigations


Tax Investigations Overview

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Receiving an investigation letter out of the blue from HMRC can be a shock.  It is vital to seek expert, specialist advice without delay and before agreeing to any requests to meet HMRC in person.

TYPES OF TAX INVESTIGATION

There are several different types of investigation:

  • basic “s9A” enquiries into particular aspects of a recently filed tax return;
  • Code of Practice 8 (“COP8”) investigations into larger and more complex matters where fraud is not suspected;
  • Code of Practice 9 (“COP 9”) Contractual Disclosure Facility (“CDF”) civil investigations into an individual and businesses under their control where they are suspected to have committed tax fraud – perhaps going back many years.
[Additionally, HMRC sometimes open criminal fraud investigations rather than civil investigations of fraud under COP 9.  Anybody subject to criminal investigation should seek urgent legal advice.]

THE REASONS FOR INVESTIGATION

HMRC initiate tax investigations for a variety of reasons:

  • human scrutiny of submitted tax returns by Tax Inspectors after their submission can sometimes identify things that seem odd without more information;
  • HMRC now has a sophisticated data matching and risk assessing computer system called CONNECT which was developed for it by BAE systems – this compares information in submitted tax returns to a wealth of information held on dozens of different types of database, including bank and credit card accounts, Land Registry, Companies House and overseas information provided under information sharing agreements – an apparent anomaly identified by CONNECT is often all that is required for HMRC to decide to open an enquiry;
  • the enquiry can be random – albeit, increasingly based on generic risk assessments generated by CONNECT;
  • sometimes HMRC receives a report of an irregularity – for instance, from a current or former employee, spouse or business partner or from a Court where allegations of tax irregularities might have been made during acrimonious proceedings.
HOW FAR CAN HMRC GO BACK?

The number of years that HMRC can go back and assess any omissions to tax depends upon the “behaviours” involved, for non-overseas related matters:

  • up to 4 years after the end of the tax year or accounting period where an “innocent error” was made or where a taxpayer did not submit a tax return, “failed to notify” HMRC of their liability to tax but has a “reasonable excuse”;
  • up to 6 years after the end of the tax year or accounting period where an error was “careless”;
  • up to 20 years after the end of the tax year or accounting period where a “deliberate error” was made in a tax return or where a taxpayer did not submit a tax return, “failed to notify” HMRC of their liability to tax and has no “reasonable excuse”.
Additional, gradually extending time limits, apply for overseas related matters.

A specialist adviser will address the behavioural factors as a crucial part of their work in seeking to limit the scope of the HMRC investigation and the amount of additional tax ultimately payable.

PENALTIES AND LATE PAYMENT INTEREST

In addition to repayment of any tax found to be underpaid and still assessable, penalties and late payment interest are also potentially payable.

Depending upon the behavioural reasons for the underpayment of tax, any agreed mitigation and whether or not the irregularities are overseas related the tax geared penalties can range from a minimum of 0% of the unpaid tax through to a theoretical 300% of the unpaid paid in the most serious overseas related cases.

A specialist adviser will address the behavioural factors to ensure that penalties are determined within the appropriate statutory banding and that the maximum amount of mitigation is claimed.

STAGES OF A TAX INVESTIGATION

Typically:

  • HMRC will initiate the investigation with a letter explaining that they are opening an enquiry and explaining the sort of enquiry they are opening;
  • the professional tax advisers and HMRC will then begin an initial dialogue and meetings to discuss the nature of HMRC’s concerns and the scope of the work required to address them;
  • the advisers will undertake an information gathering exercise with the client;
  • the advisers will perform a detailed technical analysis of the information provided to form their own professional conclusions on the extent to which any tax liabilities exist;
  • the advisers will prepare a report to HMRC addressing HMRC’s concerns, concluding on any liabilities and including computations of any unpaid tax and late payment interest;
  • HMRC will review the advisers’ report and form their own preliminary conclusions;
  • the advisers and HMRC will then meet and correspond to address any remaining HMRC areas of concern;
  • the advisers and HMRC will negotiate to seek agreement on any additional tax payable as well as the level of penalties applicable;
  • the agreement will be formalised – whereupon, the taxpayer will pay the outstanding liabilities or agree time to pay arrangements and the investigation will be formally closed.
In a minority of cases, where agreement cannot be reached, the taxpayer can enter the appeals process – as described on our appeals page.