Tax Investigation Service

“[A taxpayer] is entitled to arrange his affairs so as to reduce his liability to tax” – Lord Wilberforce (WT Ramsay v HMRC, House of Lords).

The tax investigation process allows HMRC to identify errors in tax returns, recoup any money owed and stop people getting away with submitting fraudulent claims.

Every year, there’s a ‘tax gap’ – the difference between the tax that should be collected and the amount that’s received. It’s HMRC’s job to make sure this gap is as small as possible. Last year HMRC calculated a £35.5 billion shortfall. More than half of missing tax is usually traced back to small businesses and individuals via tax investigations, with a significant proportion of the tax loss being from innocent error.

So, if you’re the recipient of a tax investigation notice, a tax inspector is going to be delving into your records to work out if you’ve underpaid your tax.

When it comes to the scrutiny of HMRC, nobody is exempt. Individual taxpayers, business owners, sole traders and directors of limited companies could all find tax returns under HMRC inspection.

But still, you’re probably wondering, out of the 12 million plus returns HMRC receives annually, why have they selected yours for an investigation?

• Late returns – Consistently filing returns late
• Changing information – Changing information in a filed return
• Late payments – Regularly making late tax payments
• Random selection – Being selected at random for investigation
• Tip-offs – Tip-offs from members of the public
• Rejected information – Your return doesn’t reflect information held by HMRC
• Inconsistencies – Inconsistencies in your records or behaviour that raises HMRC’s suspicions (e.g. a large rise in costs or fall in income)
• High-risk sector – Working in a high-risk sector (e.g. cash trades) or an industry HMRC is proactively targeting

Tax inspectors have the right to dig into the details of your tax return to make sure you’re paying the right amount of tax. The process is complicated and how we respond will depend on several factors:

Type of investigation

It is not always obvious what type of investigation you are facing. Is the notice a ‘nudge’ to encourage you to comply or are they actively launching an investigation?

The extent of the investigation

Are HMRC examining a particular aspect of your tax return, or is everything under scrutiny?

The type of investigation provides the biggest indication of how complicated the process might be.

1. An aspect investigation

HMRC suspect there is a specific inaccuracy on your self-assessment tax return. The inspector will want to check the records associated with this part of your tax return.

2. A full investigation

In a full investigation, every element of your tax return can be examined in detail. In short, the inspector may ask for all records for the tax year in question.

Not every HMRC brown envelope will be a notice of an impending investigation. If you receive any of the notifications below, HMRC have flagged you for some reason. The good news is they’re giving you an opportunity to avoid a full investigation.

One to many letters

Standard ‘one to many’ letters are sent to groups of taxpayers highlighting changes in legislation that are specifically relevant based on previous returns. Sometimes a response to these is not appropriate.

Nudge letters

Like a ‘one to many’ letter, a nudge letter isn’t notice of an official investigation, but they shouldn’t be overlooked. These letters are sent based on discrepancies identified when HMRC cross references data it receives with a filed tax return. Treat these letters as a serious prompt to review your tax position, identify any problems and, most importantly, make it right if neccessary.

Offshore income or gains disclosures

HMRC now receives data from over 100 countries. If HMRC suspects offshore income or gains have not been reported, you have an opportunity to come forward using the Worldwide Disclosure Facility, which might reduce penalties.

Your PEM tax investigation specialist will help you understand why HMRC has launched an investigation.

The first thing you should expect from a tax investigation is a request for information, documents and records. But the response to this is far from straightforward.