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How tax Investigations work

Meeting

If you are required to attend a meeting with an inspector, this will usually take place at the inspector’s office, but can be held at your premises or your accountant’s office by request.

You don’t have to attend the meeting and the inspector can’t force you to do so, but a meeting is often the quickest and simplest way to progress an enquiry.

If you are requested to attend a meeting with a tax inspector during a full enquiry, you should ask for an agenda and adhere to it during the meeting.

The standard format of an agenda usually proceeds as follows:

Opening

The inspector will explain HMRC’s right to enquire. They will advise you that notes will be taken and that these notes will be referred to later.

Specific Questions

The inspector will usually have questions relating to specific aspects of the business, including, but not limited to:

  • Historical background of the business
  • Work undertaken
  • Changes over recent years
  • VAT issues
  • PAYE, if applicable
  • Who does what in the business
  • Record keeping
  • What records are maintained
  • Cash handling and banking policy
  • Timing of invoices
  • Payment of expenses, cash and cheque
  • Business receipts, cash and cheque
  • Personal and private expenditure
    • Loans from friends and family
    • Betting wins
    • Endowments maturing
    • Legacies

Directors

When enquiring into company, HMRC also has the right to enquire into the personal finances and circumstances of directors. However, directors are a separate legal entity to the company, and the company can’t be asked to supply director’s personal financial records.

Specific Concerns

Any specific concerns arising from the examination of the business records, not covered by the above.

Summary

At the end of meeting, the inspector will summarise where the enquiry currently stands after the meeting. If the enquiry can be concluded at this point, the inspector will advise you of this. Alternatively, the inspector will detail any information required and agree a timescale for the production of documents.

Concluding The Enquiry

No Adjustments

If there are no adjustments, the inspector will say so and the self-assessment will be accepted as submitted.

Minor Adjustments

The inspector will advise you of the reasons for the adjustment, and how the quantum has been calculated. The inspector will amend the self-assessment using these figures.

You will be given 30 days to appeal. An appeal will ultimately be heard by the First Tier Tribunal.

 

Larger Adjustments

Where larger adjustments are sought, the inspector will assume that similar errors or misstatements occurred in earlier and possibly later years. The inspector won’t want to review these records, but will use the presumption of continuity. The level of adjustment sought in year of enquiry will form the basis of adjustments for other years.

The number of earlier years brought into any settlement will depend on the reason for the error identified. If the adjustment arose from a careless error, HMRC can include a maximum of 6 earlier years in the settlement but if the error was deliberate then HMRC are able to go back for 20 years

Only one enquiry can be undertaken per return, so once a closure notice is issued there can be no further questions in that return, but that doesn’t mean that an investigation can’t be opened on a subsequent return.

Penalties

Where adjustments are identified, a penalty can be charged for the submission of an incorrect return.

The penalty regime tries to focus on and penalise the behaviour that led to the adjustment required. This penalty regime applies equally to tax and VAT returns and firstly considers the reason for the incorrect return, namely:

  • Mistake despite reasonable care
  • Failure to take reasonable care (careless)
  • Deliberate but not concealed
  • Deliberate with concealment

Reduce Your Chances

While there is no way to safeguard against tax investigation, you can take some steps to minimise your risk.

  • Submit your tax returns on time
  • Be accurate and complete
  • Explain any changes before the question get asked
  • Keep good records and declare everything

Larger Adjustments

Where larger adjustments are sought, the inspector will assume that similar errors or misstatements occurred in earlier and possibly later years. The inspector won’t want to review these records, but will use the presumption of continuity. The level of adjustment sought in year of enquiry will form the basis of adjustments for other years.

The number of earlier years brought into any settlement will depend on the reason for the error identified. If the adjustment arose from a careless error, HMRC can include a maximum of 6 earlier years in the settlement but if the error was deliberate then HMRC are able to go back for 20 years

Only one enquiry can be undertaken per return, so once a closure notice is issued there can be no further questions in that return, but that doesn’t mean that an investigation can’t be opened on a subsequent return.

Penalties

Where adjustments are identified, a penalty can be charged for the submission of an incorrect return.

The penalty regime tries to focus on and penalise the behaviour that led to the adjustment required. This penalty regime applies equally to tax and VAT returns and firstly considers the reason for the incorrect return, namely:

  • Mistake despite reasonable care
  • Failure to take reasonable care (careless)
  • Deliberate but not concealed
  • Deliberate with concealment

Reduce Your Chances

While there is no way to safeguard against tax investigation, you can take some steps to minimise your risk.

  • Submit your tax returns on time
  • Be accurate and complete
  • Explain any changes before the question get asked
  • Keep good records and declare everything

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Contact us

  • 0333 577 0829
  • info@churchilltaxconsultants.com
  • We have a team of over 50 in-house experts which includes Tax Advisers, Tax Consultants, Tax Technicians, Ex HMRC Inspectors, Accountants, Report Writers and Case Managers.
  • Head Office London: 125 Kingsway, London WC2B 6NH
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  • Edinburgh: 1 Lochrin Square 92-98 Fountain Bridge Edinburgh EH2 3BU

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If you would like to know more about our tax advice or tax investigation services, please get in touch by filling out our enquiry form. One of our experts will endeavour to contact you back in the shortest time scale possible. If your enquiry is urgent, you could always contact us using our telephone numbers located on this page.