HMRC’s Approach to Enquiries or Common Negligence

HMRC enquiries can seem daunting to your clients. With the right support, you can help them through the process and provide them with reassurance.

In this guide, we give an overview of common reasons for HMRC enquiries, types of common negligence, the potential penalties and how to handle tax compliance enquiries.

Overview of HMRC Enquiries

An HMRC enquiry is the process by which HMRC starts to formally check a tax return. There are many reasons why HMRC may want to target a particular individual or business: it could be a random selection, a result of risk profiling, or the detection of errors in a tax return. For tailored support, ICPA offers tax advice for accountants to help navigate these enquiries effectively.

HMRC must follow a specific legal procedure for these enquiries. First, they will write to the business or individual concerned to notify them of the enquiry, which will be done within 12 months of them filing the return in question. They will request information and any relevant documentation about the tax return and may suggest a meeting to clarify. Once they have processed this information, HMRC will let the party concerned know whether they can accept the return or whether further tax payments are required.

While some enquiries are random, others may be triggered by things like discrepancies, industry risks, or whistleblowing.

Types of Common Negligence

There are three types of common negligence that HMRC may investigate.

1. The first is careless mistakes and oversight. This may include clerical errors and the inclusion of outdated information—such as failing to update records when fees have been increased.
2. The second is a failure to take reasonable care. A lack of due diligence and inadequate record-keeping—failing to include every business transaction or omitting key information from company accounts—would fall under this definition.
3. The third is deliberate negligence or evasion. Under this definition are intentional misrepresentation, as well as concealment of income – for example, cash-in-hand payments that are not included in a company’s accounts.

Penalties for Negligence

HMRC penalties for common negligence are calculated based on behaviour and disclosure. Generally, they will charge penalties as well as the additional tax and interest that are owed.

If the penalty is the result of a careless error on your client’s part, your client may be able to ask HMRC to suspend that penalty for up to two years. However, this suspension will only be upheld if the client keeps to the terms of the suspension – if those terms are broken, the penalty will be immediately payable.

Serious negligence can have criminal consequences, from fines to prosecution and even imprisonment, depending on the severity. Should this happen to one of your clients, it could have a devastating impact not only on their professional reputation but on yours – and may put you at risk of further scrutiny and a poor reputation going forward.

Handling HMRC Enquiries

All of your correspondence and documentation relating to an HMRC tax compliance enquiry should be carefully filed in one place. After receipt of the letter from HMRC, you and your client should begin to prepare the necessary documentation and response strategies, gather the required evidence, and provide a timely reply. For further assistance, consider using our tax advice lines to ensure you are fully prepared.

When engaging with HMRC officials, it is vital to be cooperative and maintain professional conduct at all times. An enquiry doesn’t necessarily mean that your client is accused of wrongdoing: cooperating fully will make the process far easier.

Once HMRC has provided their response, you and your client can begin an appeal if you are not happy with the outcome. It may be that you disagree with the adjustments that HMRC have proposed. Here, you have three options: attempt a compromise agreement with HMRC, make a formal appeal to close the enquiry via the First-tier tribunal, or raise your case with the Alternative Dispute Resolution service. For detailed guidance, you can reach out to our tax advice lines.

Should things reach this stage, you may wish to consider seeking professional industry advice and potentially legal representation.

Alternative Dispute Resolution (ADR)

Alternative Dispute Resolution (ADR) is a mediation service for situations where a dispute with HMRC and your client is unable to be resolved. ADR uses a specially trained facilitator or mediator who has had no input into your enquiry, acting as the middleman between you and HMRC to resolve the dispute.

ADR is a cost-effective, confidential way of resolving disputes in HMRC enquiries and can lead to faster dispute resolution. It is often used in more complex cases or in those where there are disputes over interpretation.

After applying for ADR, the mediator will review the case before listening to both sides. They will then make recommendations that will help you work towards a conclusion.

If you still do not agree with the outcome after ADR, you have the same rights for appeal as before.

Joining ICPA for Support

If a client of yours has been sent a letter regarding HMRC enquiries, we’re here to help. Created by accountants for accountants, the ICPA offers a range of resources, expertise and up-to-date knowledge from experienced tax professionals.

ICPA membership includes full access to Tolley’s Tax Library, which can be a significant expense if purchased individually. This industry-leading tax resource will furnish you with all the answers you need to provide your clients with the right support and to increase your own knowledge.

You’ll also benefit from access to our Tax and VAT support helplines. These are staffed by industry experts who are only a phone call away should you need any support with client queries.

We also provide networking opportunities that allow you to gain insights from industry experts. We also provide guidance and representation throughout HMRC enquiries and disputes, giving you and your clients peace of mind.

Learn more about ICPA membership here.

HMRC Enquiries and Negligence FAQs

How can repeated negligence impact an accountant’s professional reputation?

Repeated negligence and HMRC enquiries can damage an accountant’s reputation – both amongst its clients and with HMRC, potentially leading to further enquiries down the line.

Can negligence cases be used by HMRC to identify areas of high risk or concern?

Yes. Repeated negligence can mean that HMRC looks more closely at a business’ accounts going forward. HMRC also use risk profiling to determine whether a company’s accounts should be subject to an enquiry.

What role can professional bodies like ICPA play in setting standards and promoting best practices?

Bodies like the ICPA can provide guidance on industry best practices for their members. They can also offer training, support and advice on areas such as enquiries and common negligence.

How can accountants stay up-to-date with changes in HMRC’s approach or guidance?

This information is available on the GOV.uk website and can also be obtained through membership in professional bodies and associations like the ICPA.

Can HMRC enquiries or negligence cases impact client relationships and trust?

Yes. If an HMRC enquiry or negligence case is brought about because of an accountant’s actions, it may damage your client relationship beyond repair.