Kevin McLeod
Written By Kevin McLeod
Licensed Insolvency Practitioner
July 24th, 2023

HMRC filled its coffers with a record high of £606bn in the tax year ending April 2018. This figure represents an increase of 5.4% or almost £1bn on the previous tax year. A total of £186bn was Income Tax, £130.5bn was NICs, £128.6bn was VAT and £53.3bn was Corporation Tax, according to HMRC’s annual report and accounts published in July 2018. The annual report also shows that the tax authority’s compliance yield jumped by £1.4bm to £30.3bn, way ahead of its annual target.

HMRC Compliance Procedures

It’s clear from these figures that HMRC is taking a tougher approach on tax evasion and avoidance, detecting it early when it arises and tackling it effectively through tax investigation and legal action. “Every year through our compliance work, we collect or protect billions of pounds that would have otherwise been lost to the UK through fraud, tax avoidance, evasion and non-compliance,” HMRC commented recently.

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 interests. However, if tax has been underpaid, interest may be charged.

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 conducts a compliance check, you will receive an information notice in writing. 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. The timescale is typically 40 days from the date of issue of the information notice.

If you fail to provide the information requested within the deadlines cited, HMRC will issue a formal information notice and this should be taken extremely seriously it could result in a fine of up to £300. You may also receive a fine of up to £60 per day until the information requested is provided.

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 Self Assessment tax return has been filed by the company, HMRC has 12 months to enquire into any or all aspects of your tax return for irregularities. 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 make a discovery assessment within four years from the tax year in question and claim unpaid tax with interest plus penalties. In addition, if HMRC suspects a loss in Capital Gains Tax or Income tax due to innocent or careless errors, it can make a discovery assessment that goes back six years. If they suspect that the company has made a deliberate error, they can go back as far as 20 years.

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 do as much as possible to make sure that an inaccuracy doesn’t occur. If your company doesn’t do its utmost to avoid an inaccuracy, you may be charged a penalty.

If you disclose an inaccuracy before HMRC finds it, this is called an “unprompted disclosure”. If you tell HMRC about this inaccuracy at any other time, it is called a “prompted disclosure”. The 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 give you the full reduction that the law allows for quality 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.

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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.

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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 today for free and confidential advice from one of our professional advisers.