HMRC publishes what its compliance work recovers every year, in its annual report and accounts, and the figure runs to tens of billions of pounds. That is the budget behind the letter on your desk.
HMRC detects non-compliance early and pursues it through enquiry and, where it has to, through the courts. It has said consistently that its compliance work collects or protects billions of pounds a year that would otherwise be lost to fraud, avoidance, evasion and non-payment.
That said, the vast majority of individuals and businesses in the UK aren’t engaged in tax avoidance schemes and pay the right amount of tax when it’s due. However, there’s a small minority who don’t, and as a result HMRC carries out a large number of compliance checks annually.
In the hunt for new sources of revenue and to achieve its targets, the tax authority is coming down hard on basic, almost routine errors so it’s important not to get caught out by a simple compliance check. Once you receive the initial information notice consider whether you will need professional advice and gather the information they have requested and you’re sure to get through the tax enquiry without a hitch.
What Does a Compliance Check Mean?
HMRC carries out compliance checks also known as tax enquiries, investigations, assurance visits or inspections to make sure that individuals and businesses alike are meeting their tax responsibilities. A compliance check is a formal investigation into your tax affairs to make sure your tax return is correct and/or to check that any payments made by the company are for the right amount and are paid on time.
Another reason for carrying out a compliance check is to deter tax evasion and to make sure the tax system is operating fairly, so some checks are random and some are risk based.Therefore, launching a compliance check doesn’t necessarily mean that the tax authority believes there are any serious problems as many checks are simply routine.
In short, something may have triggered a compliance check, for instance, when the numbers entered on a tax return appear to be wrong or when a small business makes a large VAT claim. The only way HMRC can find out whether the return is correct is by conducting a compliance check. HMRC will bring the check to an end if nothing is wrong. However, if something doesn’t add up, the tax authority will work with you to put things right. If tax has been overpaid, it will be repaid with interest. If tax has been underpaid, interest runs on the unpaid amount from the date it should have been paid.
Individuals and companies can ask for a review or appeal against HMRC’s decision. The decision notice issued by HMRC explains what you can and can’t appeal.
The HMRC Compliance Check Letter
When HMRC opens a compliance check, it will write to you; for a tax return, this is a notice of enquiry. HMRC will usually ask for information informally first and may follow up with a formal information notice. If you use an accountant, the tax authority will contact them directly. The letter will make it clear that HMRC is conducting a tax investigation and what they specifically want to check. Certain information will be requested and this could be one of the following: accounts and calculations, company tax return and/or PAYE records and returns. HMRC does not fix this timescale in law: the notice must give you a “reasonable time” to comply, decided case by case rather than as a set number of days.
If you fail to provide the information requested within the deadlines cited, HMRC may issue a formal information notice, and this should be taken extremely seriously. Unless you have a reasonable excuse, failing to comply with it makes you liable to a penalty of £300. You may also receive a penalty of up to £60 per day until the information requested is provided. In serious cases, the tribunal can add a further penalty linked to the tax at stake.
Coming under investigation by HMRC can be a distressing affair. Once you receive an information notice, it’s crucial to stay calm, decide whether you need professional advice, gather the information requested before replying to HMRC and only provide the tax authority with the information they need to deal with the questions they have raised. If you believe tax has been underpaid consider whether a payment on account of tax due should be sent to HMRC immediately. If you are unable to meet the deadline for information, contact HMRC in advance and agree a new date.
How Many Years can the Taxman go Back?
Once a company has delivered its Company Tax Return, HMRC generally has 12 months from delivery to open an enquiry into any aspect of the return. For the Self Assessment return of an individual, the window is 12 months after the filing date, if the return was filed on time. However, if the tax authority doesn’t open an enquiry within this time limit, this doesn’t mean that everything is agreed and final as HMRC can normally make a discovery assessment up to four years after the end of the company’s accounting period (for an individual, after the end of the tax year) and claim unpaid tax with interest plus penalties. If the loss of tax was careless, that limit extends to six years: from the end of the tax year for Income tax and Capital Gains Tax, and from the end of the accounting period for corporation tax. Innocent errors are subject to the four-year limit, but where a return was filed HMRC can raise a discovery assessment only if the loss was caused carelessly or deliberately, or if the return did not give an officer enough information to be aware of it. If they suspect that the company has made a deliberate error, they can go back as far as 20 years. For Income tax and Capital Gains Tax, the 20-year limit also applies where the loss is attributable to a failure to tell HMRC that the person is chargeable to tax, even if that failure was not deliberate.
Therefore, with these four deadlines in mind as well as the tax authority’s eagerness to raise funds to fill its coffers, it’s crucial that companies seek help to avoid tax return mistakes and include all sources of incomes as well as keep a beady eye on timings, such as when the tax return is submitted and when the opening enquire letter is raised.
What is Tax Compliance?
In short, tax compliance involves making tax payments to HMRC as well as producing and submitting tax returns to the tax authority on time and in the required format.
What are the Penalties?
Your company may incur a penalty for inaccuracy. For instance, if you file a tax return or other document that contains basic errors or inaccuracies and this result s in tax being underpaid, understated or over-claimed. A penalty may be incurred if the inaccuracy was careless, deliberate or deliberate and concealed. HMRC may also charge a penalty if your company asks an employee or adviser to do something on its behalf as the company must still take reasonable care to make sure that an inaccuracy doesn’t occur. If your company took reasonable care, there is no penalty for the inaccuracy. The exception is where the company later finds the error and does not take reasonable steps to tell HMRC; the inaccuracy is then treated as careless.
A disclosure is “unprompted” only if you make it when you have no reason to believe HMRC has found, or is about to find, the inaccuracy. Any other disclosure is “prompted”. Once a compliance check has started, a disclosure about the matters being checked will usually be prompted. The minimum penalty for an unprompted disclosure is lower than the minimum penalty for a prompted one. For instance, if you send HMRC a tax return or other document that you believe is correct and you subsequently find that it contains a careless error, HMRC may be able to reduce the penalty to zero if you make an unprompted disclosure.
Companies can reduce penalties by helping HMRC with its tax enquiry. This type of assistance is known as “quality of disclosure” and it can include telling HMRC about or agreeing that there is something wrong and how and why it happened or telling HMRC everything you can about the extent of what is wrong as soon as you know about it.
If you delay informing HMRC about the inaccuracy, you may still get a reduced penalty rate, but the reduction will be smaller. If HMRC don’t need any extra help from you, it will still give some reduction for telling, helping and giving access. The size of the reduction depends on the timing, nature and extent of your disclosure.
Please go to HMRC Penalties for inaccuracies in returns and documents to view the eight stages in working out the amount of any penalty.
What is the HMRC Compliance Contact Number?
Tax is a fact of life, and being subjected to a compliance check by HMRC for late, non-payment or underpayment of tax can be distressing. However, if you maintain robust financial records, manage your business responsibly and deal with HMRC in a professional manner, you’re sure to sail through the process.
If you need to contact HMRC with a general enquiry about self assessment, call 0300 200 3310. If you would like to make a disclosure, call the HMRC disclosure line on 0300 123 1078.
Need a Free Confidential Consultation?
If you have received an initial information notice from HMRC and would like to know more about the tax enquiry process, please call 0208 444 3400 or email info@aabrs.com today for free and confidential advice from one of our professional advisers.