Tips on Surviving an HMRC Investigation
By Mark McLaughlin
Mark McLaughlin offers some practical tips for individual taxpayers who are subject to an enquiry by HM Revenue & Customs into their tax returns.
A tax return enquiry by HM Revenue and Customs (HMRC) is not a pleasant experience, to say the least. For many taxpayers, an enquiry can be very worrying and stressful.
A tax return enquiry may be ‘full’ or ‘aspect’. In a full enquiry, HMRC broadly look at all the significant risks of error in the return. An aspect enquiry falls short of a full enquiry into the whole return, but instead concentrates on one or more aspects of it. This article is mainly concerned with full enquiries into tax returns.
A taxpayer whose return is enquired into may wonder whether HMRC has deliberately chosen their return, or whether they have simply been ‘unlucky’. In fact, HMRC may enquire into any tax return. However, most enquiries are risk-based selections. Only a very small proportion of returns are taken up for full enquiry on an entirely random basis (see HMRC’s Enquiry manual, at EM0093).
The following selection of tips is aimed at individual taxpayers who have made an honest attempt to submit a full and correct tax return (it goes without saying that those who do not should change their ways!). These tips are aimed mainly at the early stages of an enquiry.
1. Prevention is better than cure
HMRC generally wants to increase its efficiency in enquiry work, by targeting taxpayers who represent the biggest risk of non-compliance. Taxpayers who always file their tax returns and pay their tax liabilities on time are normally less of a ‘risk’ than those who do not.
When completing tax returns, taxpayers (and their agents) should make best use of the ‘white space’, to fully explain any unusual or ‘one-off’ entries. This will not necessarily prevent an enquiry into the return. However, it may prevent HMRC making a ‘discovery’ after the statutory time limit for commencing an enquiry has ended.
2. Take cover!
Consider taking out ‘fee protection’ insurance. This is broadly insurance against the professional costs (e.g. tax advisers’ or investigation specialist fees) of dealing with an enquiry on the taxpayer’s behalf. This is particularly important for those taxpayers who are potentially at higher risk of an HMRC enquiry (e.g. self-employed individuals with cash-based businesses, such as market traders or taxi drivers).
Of course, fee protection insurance will not prevent an HMRC enquiry. However, it does provide some comfort to taxpayers that, if an enquiry is opened, they can be represented by a suitably experienced professional, without the added worry of bearing all the related costs themselves.
3. Is HMRC too late?
HMRC will normally send an enquiry notice to the taxpayer at the outset. HMRC have a limited time in which to commence an enquiry into the tax return, i.e. twelve months after the day on which the return was delivered to HMRC (although different time limits apply in some circumstances, such as if the return was filed late, or has been amended) (TMA 1970, s 9A(2)).
It is not uncommon for HMRC to commence an enquiry around the end of the above enquiry ‘window’. Always check that the enquiry notice has been received within the statutory time limit. It is not sufficient for HMRC to post an enquiry notice before the time limit - it must be received within the statutory deadline. This point is acknowledged in HMRC's own guidance, which states (at EM1506): “Your notice must be received before the time limit. The Courts assume that second class post takes 4 working days to be delivered and first class post takes 2 working days. Working days do not include Saturdays, Sundays or Bank Holidays.”
4. Get on top…and stay there
There are many happier pastimes than dealing with an HMRC enquiry; it can therefore be tempting to ignore correspondence from HMRC, or at least leave it until the last minute to reply. However, this can be counter-productive, as the HMRC officer may assume that delays are indicative of underlying problems, leading to incorrect assumptions about the accuracy of the return.
Keep off the back foot. Respond to HMRC's correspondence within the time limit given (i.e. typically around 30 days). If it is not possible to keep within HMRC’s deadline, contact the HMRC officer within the initial time limit to explain the reason for any delay, and to set a new timescale for replying.
If the HMRC officer is slow to deal with correspondence, do not be afraid to give them a gentle nudge.
5. Your place or mine?
HMRC will often suggest a meeting in the early stages of a full tax return enquiry. HMRC officers quite like meetings; they are trained in interview techniques. However, there is no obligation for a taxpayer to attend a meeting in a routine HMRC enquiry. If a meeting is undesirable for any reason, HMRC should be duly informed. However, it should be emphasised to HMRC that full cooperation will be given in correspondence (this could be important if penalties become an issue later on).
Where should any meeting with HMRC take place - at the taxpayer’s business premises (if applicable), or at the offices of HMRC, or those of the professional adviser? Many advisers (but not all) consider that the meeting should take place where the taxpayer feels more comfortable - this will often be the adviser’s offices.
6. What's on the agenda?
Prior to any meeting, the HMRC officer should be asked for a detailed agenda of items that they wish to discuss on the day. There is nothing worse than the taxpayer or his adviser being faced with a number of completely unexpected questions.
Preparation for the meeting is important, and is also likely to put an otherwise anxious taxpayer more at ease.
7. At a meeting…
HMRC officers often attend meetings in pairs. There may be a perfectly innocent explanation (e.g. to enable one of them to ask questions, and the other to take notes).
However, it will do no harm to check why an additional HMRC officer is present (e.g. is he a specialist in a particular area of tax?).
8. …and later
The HMRC officer may prepare notes of the meeting, and later ask the taxpayer or adviser to approve them. Whilst it is arguable whether notes should be ‘approved’ as such, it would certainly be worth reviewing them carefully; it may be difficult to challenge the notes later on (e.g. if there is a material omission or inaccuracy), such as if the appeal reaches the tax tribunal (see Duffy v Revenue & Customs Comrs  STC (SCD) 377).
Taxpayers or advisers may find it helpful to take their own meeting notes, and possibly compare them with any prepared by HMRC.
9. No fishing!
Cooperation in HMRC enquiries is generally a good idea. For example, if an error is found in the tax return which leads to HMRC imposing a penalty, the taxpayer’s cooperation may help to reduce the penalty charge. If nothing else, cooperating with HMRC is likely to result in the enquiry closing sooner rather than later.
However, HMRC officers will sometimes go on a ‘fishing expedition’ where one enquiry leads to another, particularly where the HMRC officer is struggling to find any errors in the return. If this tactic is used, it should be firmly (but politely) resisted, unless the officer provides a very good reason for doing so.
10. Help is at hand
Taxpayers who are not already represented are likely to find that obtaining professional advice is money well spent (and in some cases, merely the cost of a fee protection insurance premium).
Published October 2014