What HMRC can (and cannot) ask for during a tax investigation

When you are subject to a tax investigation, it can feel like HM Revenue & Customs (HMRC) has carte blanche to inspect every financial aspect of your life.

However, there are firm legal boundaries around what HMRC can and cannot request.

We often see confusion around HMRC’s statutory powers, and the protections afforded to taxpayers, so I felt a quick explainer article might help illuminate things.

Understanding HMRC powers

Under Schedule 36 of the Finance Act 2008…

An officer of Revenue and Customs may by notice in writing require a person (“the taxpayer”) –

1. to provide information, or
2. to produce a document,

if the information or document is reasonably required by the officer for the purpose of checking the taxpayer’s tax position.

This includes business records, bank statements, and contracts relevant to the return under review.

An information notice only requires a person to produce a document if it is in the person’s possession or they have the power to obtain it.

Safeguards are in place to protect taxpayers in relation to certain classes of documents.

For example, HMRC cannot routinely demand ‘old documents’ i.e. those created more than six years ago.

However, HMRC may be entitled to request old documents where it has reasonable grounds to suspect a deliberate error in a return (tax fraud).

HMRC cannot require a taxpayer to create new documents solely for the purpose of compliance during a tax investigation.

Nor can they access legally privileged information (such as certain communications with your solicitor).

Under Schedule 36 HMRC can impose penalties if you don’t comply.

When HMRC can inspect premises

An officer of Revenue and Customs may enter a person’s business premises and inspect –

1. the premises,
2. business assets that are on the premises, and
3. business documents that are on the premises,

if the inspection is reasonably required for the purpose of checking that person’s tax position.

This is usually prearranged, although unannounced visits are possible in cases involving suspected tax fraud.

However, they must have either the taxpayer’s consent or Tribunal approval if the request is contested.

Typically, inspections happen more often in the context of a VAT check, rather than for an enquiry into income tax or corporation tax.

Common areas of overreach

In the course of a tax investigation, it’s not uncommon for HMRC officers to overstep by requesting personal records irrelevant to the business or asking open-ended questions beyond the scope of the enquiry.

Sometimes it can be helpful to give HMRC more than it has asked for if that allows you to quickly explain your position and close the enquiry down.

However, if HMRC is overreaching, you should carefully consider whether you should, or must, respond.

It can sometimes be a difficult balance between trying to cooperate with an HMRC enquiry and pushing back against frivolous or onerous requests.

This is where having expert guidance on your side can be helpful.

When responding to information requests, it is also helpful to try to look at the request through HMRC’s eyes.

• Why do they want this?
• What does this information show?
• If I provide this, are there obvious questions that HMRC might ask that I can pre-empt with an explanation now?

With guidance, your responses can be focussed on bringing an enquiry to a close, rather than opening up more questions and requests for data.

Equally, keeping accurate tax records in line with your obligations under self-assessment is important during a tax investigation, and you certainly should not destroy anything.

What to do if you receive an information notice

If you receive an information notice, consult a specialist tax disputes advisor before responding.

Remember that how you communicate with HMRC will affect the level of any HMRC penalties that might be charged.

A tax disputes specialist will ensure you comply fully without volunteering unnecessary information and could prevent you falling into deeper trouble with HMRC.

For help and guidance with a tax investigation, please speak to our team.

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. However, 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