HMRC Enquiries and Investigations – How does HMRC tackle tax errors?

HMRC has numerous functions, many of which are administrative. The most feared part of HMRC, however, is ‘Compliance’, these are the people who send the brown envelopes with questions inside them that can strike fear into the heart of even the most honest businessperson.

So, how does HMRC conduct its compliance activity? Here we cover a number of the ways that HMRC investigates individuals and businesses.

HMRC’s Case Selection Approach

Firstly, how does HMRC decide who to investigate? Some cases are entirely random, there is an ongoing programme of random enquiries run by HMRC and always has been. Most cases, however, are selected based on data HMRC holds and perceived ‘risk’. Perhaps you declare £25,000 per year in income, but Experian shows you have a £750,000 mortgage. That might throw up a red flag. Large changes in expenses might also pique HMRC’s interest. Specific technical issues, common mistakes or tax avoidance schemes would also lead HMRC to investigate certain groups of taxpayers.

HMRC has a complex and powerful system called ‘Connect’ which is fed huge volumes of data from many sources. The system will find the anomalies outlined above, and more, and throw up pertinent cases for review. There is a team within HMRC assigned to point Connect at certain data to identify problem areas – for example, the recent HMRC campaign targeting dog breeders, which probably looked at pet adverts and Kennel Club data and compared that to self-assessment tax returns to identify individuals for enquiry.

On the VAT side, HMRC will often aim to visit traders, especially newly established ones, to ensure compliance. Of course, within VAT there can be technical issues, but new businesses seeking a VAT repayment, or a large repayment claim, when normally there have been VAT payments, are likely to receive a check.

In some instances, HMRC will receive tips offs from members of the public or other government agencies, and it will investigate because of those.

If you are notified of an enquiry, or if HMRC asks questions, although it might be random, there is a reasonable chance that something specific in your tax return, or related to your circumstances, has caused HMRC to want to know more.

HMRC Enquiries

With direct tax (income tax and corporation tax) HMRC can open formal enquiries – however, there are time limits for doing so. Often HMRC will call this a ‘Compliance Check’ in its correspondence.

Some taxes do not have a formal enquiry process, however. In this instance, HMRC will write to ask questions and, if necessary, will use formal information powers to obtain the information it wants. HMRC can also use information powers in cases where there is a formal enquiry.

In some instances, HMRC might visit business premises, usually by prior arrangement. This often happens in VAT checks.

HMRC Nudge Letters

HMRC has had a long running campaign of ‘Nudge Letters’. This is where HMRC believes that a taxpayer may have missed something, but rather than opening an enquiry, it will send a letter suggesting that the taxpayer checks themselves that all is okay and if not, they make a disclosure. Lots of disclosures occur due to these letters. For those needing to make a disclosure, there are various routes, including HMRC’s Let Property campaign, worldwide disclosure facility, digital disclosure facility and COP9 (or Contractual Disclosure Facility – “CDF”). More details of these can be found in our services pages – we have helped hundreds of people to make disclosures to HMRC over the years.

HMRC Criminal Investigations

Committing tax fraud is a criminal matter. However, most cases of tax fraud are investigated on a civil basis – this involves looking for the tax and penalties, but not a prosecution. Often these are conducted under COP9 or CDF.

However, HMRC does conduct criminal investigations, with a view to prosecuting. These might include an HMRC raid and arrests as part of the process, or sometimes HMRC might invite a person suspected of fraud to an interview under caution when it has sufficient evidence that something significant is probably wrong.

Cases are selected for criminal investigation based on HMRC’s criminal investigation policy. Where a person is in a position of trust or authority, they might be more likely to be investigated criminally than if the same offence had been committed by ‘the person on the street’. Cases that involve presentation of false documents or destruction of documents are more likely to escalate to criminal, as are those involving organised criminality among a group or gang.

The amount of tax is not necessarily part of the criteria for criminal investigation. Some small cases are prosecuted for their deterrent effect.

Anyone facing criminal investigation should seek the advice of a properly qualified lawyer. Even a fairly polite invitation for an interview under caution should not be dealt with by a non-lawyer, in our opinion. We sometimes support criminal lawyers with the tax aspects of a criminal investigation, but these types of cases should always have legal representation as well.

When Should I Consult a Specialist?

If you are facing a criminal investigation, firstly you should instruct a lawyer. You may also need the help of a tax disputes specialist, like inTAX, but proper legal representation is paramount in these instances.

For most tax disputes, a specialist with tax enquiry experience can help, rather than a lawyer (although some lawyers are also specifically tax qualified).

For COP9 cases HMRC itself advises that you should seek specialist help from those who are experienced in tax disputes. It is important to obtain assistance from someone who knows the process and who can help you navigate it properly, and without escalating the issue. We have helped many people through COP9 – having someone by your side who knows and can explain the process removes much of the uncertainty and worry, as well as achieving the best result.

If you have an enquiry that has gotten ‘stuck’, it can also often be extremely helpful to have a tax specialist involved, particularly if the matter might be heading to Tribunal or to Alternative Dispute Resolution (“ADR”).

If the HMRC team is just asking a few questions and the answers are simple and uncontroversial, we would generally suggest that no specialist assistance is needed. However, it is when things are more serious or entrenched that help from a tax specialist can support you to move things forward. Also, if HMRC come knocking and you already know you have wider issues and need help disclosing, a firm like inTAX can help you through that process.

You can get in touch with our friendly and experienced team on: 0203 675 8122 or email jeremy.johnson@intaxltd.com.

inTAX is a specialist tax disputes firm. We deal with disclosures, investigations, and tax enquiries of all descriptions, including COP9, fraud investigations, VAT fraud, tax avoidance, let property disclosures and tribunal appeals. But we don’t just deal with the serious end of tax investigations; we are also happy to handle smaller enquiries, disputes and problems that can be equally as worrying for our clients.