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What Happens If Your Business Is ‘Chosen’ For An HMRC Enquiry?

What Happens If Your Business Is 'Chosen' For An HMRC Enquiry
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    What is an HMRC investigation?

    This is referred to as a ‘compliance check’ now. This is how HMRC checks the tax returns submitted in detail to ensure that they are correct and complete. They have the right to enquire into any statutory return, claims and amendments made in return or not included in the returns. The checks are done by seeking information from the taxpayer, asking questions, and reviewing the records maintained.

    Therefore, all taxpayers need to ensure all information and documents used to prepare their tax returns are maintained until the time allowed for HMRC to inquire is passed.

    Please note if the records are not maintained, HM Revenue and Customs can seek a maximum penalty of £3,000.

    How is a return selected for enquiry?

    HM Revenue and Customs usually select a return for enquiry based on risk. The risk is determined by the nature of the work performed by the taxpayer and the source of income. Therefore, there is a possibility that your return might be one of the small samples picked at random.

    In addition, there are many sources of information from which HMRC can use to determine and analyse that your return might not be correct as well.

    These sources include banks on savings interest earned, information picked up from enquiries into other businesses, returns from employers.

    Types of enquiries: HMRC classification

    Full enquiries

    This seeks to address all significant risks of errors in a return, including the risk of incorrect return and leading to a comprehensive check into the records and return. This will be done by checking the taxpayer records and any available third-party information.

    For example, there might be a satisfactory explanation for an omission in the tax returns found through third-party information. In this case, since the risk is identified and found to be significant, HMRC will raise a full enquiry to carry out a complete proper examination of the records to ensure the taxpayer’s position is accurate.

    Random Enquiries

    This is a standard procedure to target tax avoidance, possibly targeting businesses deemed as high risk. There is less chance of high-risk businesses being entirely picked at random for the enquiry. These enquiries worked precisely in the same way as to complete investigations.

    The main reasons for this enquiry to take place are:

    1. Ensure that all areas of the self-assessment population are looked into and not just high-risked ones.
    2. To get additional information to help identify the risk assessment
    3. Evaluate the amount of non-compliance present in the self-assessment population and improve the estimates in the tax gap
    4. Inform taxpayers of the compliance strategy
    • Aspect enquiries (or compliance check)

    This seeks to address the risks identified in one or more aspects of the tax return. Therefore, the request was made for documents and information on those specific areas.

    For example, suppose a taxpayer has received proceeds from the disposal of their company, HMRC may want to ensure the correct profit has been declared in the tax returns and if the reliefs claimed to ensure their validity towards the claim. Therefore, they may require answers to questions and proof of when the company closed, cross-check the Companies house records and final withdrawals of closed companies to justify that the claim is accurate.

    Timeline for Opening an Enquiry

    HM Revenue and Customs typically have 12 months from the date the taxpayer’s return is filed to notify that it is enquiring on your tax return. If the return is filed after the 31st of January, HMRC has the right to open an enquiry for up to 15 months from the filing date.

    The taxpayer was notified of the enquiry via a letter from HM Revenue and Customs.

    This letter may have the following:

    • Confirm the type of enquiry taking place
    • Request information or documents relevant for the enquiry
    • Provide pertinent explanations for the enquiry
    • Provide a deadline for sending the information requested

    The taxpayer might ask to attend a meeting as this would be the best way to explain anything unclear.

    During the Process of the Enquiry

    Firstly, the taxpayer is obliged to respond to the letter they have received, providing whatever is requested from them. It is essential to ensure that information provided to HM Revenue and Customs is accurate. If the wrong information is provided, the taxpayer will be penalised. Therefore, if a question is asked from you and you are unsure, do not guess. The taxpayer has the right to say they don’t have the answer and request a grace period to find the information or document.

    If the taxpayer is called in for a meeting, it is crucial to be aware of what is requested from them. You can ask for an agenda in advance for this meeting.

    End of the Enquiry and its Results

    Once the enquiry is closed, HMRC will write a letter informing you that the investigation finished and if they have accepted the tax return submitted.

    If HM Revenue and Customs found something wrong with your returns, like errors or amendments to be made resulting from negligence, they will write to you saying the return needs to be corrected with a deadline. If the returns have not been amended within the deadline mentioned, HMRC will do it themselves. This will result in the amendment of your tax liability for the year concerned and interest charged, which may lead to an underpayment or overpayment. In addition, the taxpayers have the right to appeal for any amendments if they can justify their reason for the claim.

    If HM Revenue and Customs consider that you have been guilty of neglect and fraud, they will charge penalties, as well as interest and extra tax to pay, and other obligations put forward by HMRC will need to have adhered to.

    Frequently asked questions about HMRC enquiries

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