15th August 2014
HM Revenue & Customs (HMRC) has the authority to investigate the tax affairs of all taxpayers and seems increasingly willing to use this power to raise money for the government.
The latest figures show that the number of enquiries launched by HMRC in the year 2011-12 doubled to 237,215 with the receipts of HMRC’s compliance efforts totalling £16.7 billion.
HMRC’s primary line of enquiry is by way of a compliance check, which despite its name is a formal tax investigation. The opening of the investigation is by way of an Information Notice, which requires the taxpayer to provide answers to the questions raised by HMRC. A compliance check is separate to an enquiry into a tax return submitted by a tax payer.
To start a compliance check HMRC must have reason to suspect that tax has been underpaid. A compliance check cannot be a ‘fishing expedition’.
Why the increase in compliance checks?
Part of the reason for the increase in compliance checks is that HMRC have improved their analysis of the data they receive from third parties – such as banks with details of the accounts held by an individual. HMRC are also now collecting more information on property sales, so more checks following the sale of a property can be expected.
A considerable amount of the information received by HMRC will not have all the necessary details to determine whether tax has been underpaid.
For example a bank account may be in the name of a grandparent but the money is held for the benefit of a grandchild. From the initial information held by HMRC it seems that the grandparent has undeclared income and therefore it would be reasonable to launch a compliance check. The compliance check may then be dealt with quite quickly by responding to HMRC that the interest received on the bank account in fact belongs to the grandchildren and providing evidence to support the answer.
What happens if a compliance check finds that tax has been underpaid?
If a compliance check does result in a finding that tax has been underpaid then HMRC will collect the tax by raising an assessment. In addition to any tax payable the taxpayer may also face penalties for late payment. In addition, HMRC can charge additional penalties for non-disclosure of taxable income or gain. The non-disclosure penalties are reduced for co-operating with HMRC and providing the reason why the income or gain was not originally reported to HMRC.
The late payment and non-disclosure penalties can exceed the actual tax payable.
If tax should have been paid on an income source for the tax year ended 5 April 2014 the time limit for raising an assessment will only expire on 31 January 2015.
The normal time period during which tax may be assessed under a compliance check is 5 years and 10 months after the end of the tax year concerned.
The time limit can be extended up to 20 years in cases where there is negligent or fraudulent conduct by the taxpayer.
What to do if you receive an Information Notice from HMRC:
1. Keep calm
2. Decide whether you need professional assistance before you reply to HMRC.
3. Gather the information needed to provide a full answer to HMRC before replying to them.
4. Only provide HMRC with the information they need to deal with the questions they have raised.
5. If when reviewing your papers you do notice that tax has been underpaid consider whether a payment on account of tax due should immediately be sent to HMRC.
6. If you are not able to meet a deadline set by HMRC for you to provide an answer then contact them in advance and agree with them a revised deadline.
If you require any more information please contact Tom Lacey.