By Graham Poles, tax partner, Armstrong Watson
HMRC turned its attention back to compliance work in the wake of the COVID-19 pandemic and we are continuing to see its enquiry activity increase.
The National Audit Office reported that during the pandemic as HMRC’s resources were moved to COVID support schemes, its compliance yield was hard-hit, generating £9bn less in tax revenue than normal.
Tax officials, who are focused on tackling HMRC’s debt balance, can open a variety of enquiries into an individual’s or company’s tax affairs, ranging from a general enquiry to an in-depth tax fraud investigation.
Tax enquiries can happen to anyone – some taken up on an entirely random basis – so it is worth familiarising yourself with the types of enquiries HMRC conducts.
General enquiries
General enquiries, also referred to as ‘full’ or ‘aspect’ enquiries, are the most common.
Initiated under Section 9A of the Taxes and Management Act 1970, this is a formal investigation into your tax return and is typically undertaken if HMRC has concerns about the accuracy and completeness of a return but can be opened for any reason.
As long as your return was submitted on time, HMRC must give written notice within 12 months of its submission.
If you receive an enquiry letter you will need to gather all the information and documentation requested and respond accordingly within the relevant time periods to mitigate any potential penalties.
Discovery assessments
Discovery assessments enable HMRC to recover an underpayment of tax up to 20 years after the end of a tax year. Unlike a general enquiry though, there are conditions for a valid discovery assessment:
- HMRC must have made a discovery;
- There must be a loss of tax; and
- Assuming a return has been completed, either: Insufficient information was provided to HMRC; or errors were made deliberately or due to carelessness.
Provided these conditions are met, the number of years HMRC can go back can vary between four and 20 years after the end of the tax year depending on the underlying conduct of the taxpayer
Fraud investigations
HMRC will conduct its most intrusive enquiry under Code of Practice 9 (COP9) if it suspects income or gains have not been disclosed and tax has been deliberately avoided.
Conducted by its Fraud Investigation Services team, this is the most serious type of civil investigation by HMRC and we would strongly suggest seeking professional advice at an early stage.
