Business & Finance Legal

HMRC Enquiries: Theory X and Persecution

  • November 19, 2023
  • 6 min read
HMRC Enquiries: Theory X and Persecution

by Doug Shanks

In conversation with Speer, Hitler resented British productivity bemoaning what you could inspire people to do in a democracy. Similarly, Guardian-reading tofu-munching wokerati (to which I aspire) accountants observe that the less heavy-handed approach (e.g. Liechtenstein Disclosure Facility) supports the view that honey catches more than vinegar. The LDF was seen as excessively generous and increasingly populist governments responded to a perhaps understandable desire for retribution. The various disclosure facilities have been examined in these pages and the specialist firms have useful information on their websites. The government’s own website isn’t bad. 

For small business owners, dealing with His Majesty’s Revenue and Customs’ enquiries is daunting. It’s crucial to understand the process and navigate it effectively. What are the key aspects of HMRC enquiries? What triggers them and how to protect your business during the process?

HMRC can initiate a tax enquiry for various reasons. While some enquiries may seem random, others result from specific red flags. Factors include: 

Mistakes and Inconsistencies. Errors or inconsistencies in your tax returns can raise concerns. It’s crucial to review your returns for accuracy before submission.

Unusual Financial Performance. If your business’s results deviate from industry standards or historical data, be prepared to explain any anomalies.

Large Yearly Changes. Unexplained shifts in income or expenditure triggers suspicion. Document your reasons.

Low Proprietor Drawings. Minimal drawings will raise questions. Ensure you record how you fund personal expenses.

Business Type. Certain business types, like cash-based operations, are more susceptible to scrutiny.

VAT Returns: Claims for VAT repayments that seem inconsistent with your business activities can trigger enquiries.

How Does a Tax Enquiry Work?

A tax enquiry typically begins with a letter from HMRC informing you of the investigation. The letter may not provide specific reasons for the enquiry. HMRC officials are human. There are two primary types of enquiries:

Aspect Enquiries. These are focused investigations that target specific items in your tax return. They tend to be more technical and precise. Prepare to provide detailed explanations for the items under scrutiny.

Full Enquiries. A full enquiry indicates broader concerns by HMRC regarding your entire tax return. In such cases, HMRC will request access to all your business records for the year under review. This can be more comprehensive and time-consuming.

How Long Does a Tax Enquiry Take?

It’s essential to respond promptly to achieve momentum towards completion. The duration of a tax enquiry can vary significantly based on several factors:

Scope of the Enquiry. The more extensive the investigation, the longer it may take.

Volume of Information. If HMRC needs to review a substantial amount of data, it can extend the enquiry timeline.

Specific Tax Matters. The complexity of the tax issues being investigated can impact the duration.

Size and Complexity of Your Business. Larger and more complex businesses may have lengthier enquiries.

On average, full enquiries last around 18 months, while aspect enquiries may conclude within six months. Complex cases can extend the timeframe significantly. We are seeing enquiries taking longer perhaps because the inspectors’ resources are under pressure. 

What Happens at the End of Enquiry Proceedings?

At the conclusion of an enquiry, HMRC will arrive at one of two outcomes:

No Adjustments Required: If HMRC is satisfied that your original self-assessment return was accurate, the enquiry will conclude without further action. You can breathe a sigh of relief in this scenario.

Adjustments Necessary: If errors or omissions are identified, adjustments will be made to your self-assessment. You will have 30 days to appeal this decision. Be prepared to address any changes required and consider seeking professional advice.

The size and nature of adjustments can vary. Significant changes may lead HMRC to review other tax years as well. Penalties and interest may apply if errors were made.

How to Stay Organised During an Enquiry

Being organised during a tax enquiry is crucial to simplify the process and minimise the risk of errors. Here are some steps to help you stay organised:

Keep your financial records well-organised and easily accessible. This includes bank statements, invoices, receipts, and payroll records.

Maintain separate personal and business bank accounts to protect your privacy and simplify record-keeping.

Respond promptly to HMRC requests for information and documents. Timely cooperation can prevent unnecessary delays.

Consider seeking professional advice and representation, especially during complex enquiries. Experienced professionals can guide you through the process effectively.

How to Protect Your Business

While you can’t guarantee immunity from tax enquiries, you can take proactive steps to protect your business:

Plan ahead and submit your tax returns accurately and on time. Avoid last-minute submissions that may lead to errors.

Keep meticulous records and declare all income and expenses. Transparency is essential in demonstrating compliance.

Be prepared to explain any significant changes in your finances. Maintain documentation that supports these changes.

Include the possibility of a tax enquiry in your business continuity plan. Having a strategy in place can help you navigate the process more effectively.

With proper preparation, organisation, transparency, and the support of tax professionals, you can navigate the process more smoothly and safeguard your business’s financial well-being. Remember that seeking professional advice is a prudent step to ensure the best possible outcome during a tax enquiry. It can make a significant difference in protecting your business’ interests and minimising potential penalties.

When it goes wrong

Taxpayers trying to control the outcome by spinning, obfuscating or even lying as a major risk. HMRC has “foresuffered all enacted on this same divan or bed.” Your angle may be new to you but won’t be to them. A business owner may feel they “have paid enough tax” or that their business is a special case effectively reinventing tax law as part of their defence, or that somehow because an issue hasn’t specifically been raised at the start it will stay hidden. You will hear that HMRC are not allowed to fish. Forget it. Technically fishing is not allowed in some arcane circumstances but for the vast majority (effectively all) enquiries HMRC can fish in whatever waters it likes. 

Enquiries are hell. Rarely will one inspector be on the case throughout so you’ll find yourself being cross-examined by a second or even a third officer. Stay in the day. Seek independent advice especially if you are an accountant yourself. Answer questions fully but precisely. Don’t spin. If you have something to hide, reach for the Contractual Disclosure Facility, a relatively generous ladder down which you can climb. 

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Douglas Shanks

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