HMRC Enquiries: Prevention is Better Than a Cure

HMRC has a legal right to open an enquiry into any return. According to HMRC 11.5 million Tax Returns were submitted last year. A tax enquiry is the process by which HMRC check the information reported on a Tax Return to ensure it is correct and complete, and the purpose of an enquiry is to ensure that a taxpayer has not underpaid or overpaid tax. HMRC may conduct an enquiry through correspondence, meetings and a review of taxpayers records.

The onus is on you, the taxpayer, to prove your innocence!

OUR ADVICE

Act Now, Not Tomorrow - Here’s Our Tops Tips on How to Prevent an Enquiry

• Disclose undeclared income to HMRC as soon as possible. Why give HMRC a chance to open an enquiry? The penalties for voluntary disclosure are significantly lower ranging from 0% to 30% of the unpaid tax plus late payment interest.

• Use the additional information box to disclose any unpaid directorships or other information not already contained in your Tax Return that has an impact on your tax affairs.

• A taxpayer has twelve months from the filing deadline to submit an amended return so make sure you do it before HMRC enquire first.

• Errors in a return should be declared in writing to HMRC or by amending a return online, and if an overpayment is due, this can be done by making a claim for ‘overpayment relief’ within four years of the end of the tax year.

REASONS TO PREVENT A TAX ENQUIRY

1.      Tax enquiries can be expensive, in terms of additional fees as well as any tax, penalties and interest that may become due.

2.      Enquiries are stressful and intrusive and HMRC can seek access to your records in person thus making it an inconvenience, and it can disrupt business activities and distract your attention.

4.      Tax enquiries are time consuming and can drag on for months and even years.

ENQUIRY TYPE

An enquiry may be ‘full’ or ‘aspect’ and described as a ‘check’. In a full enquiry, HMRC broadly look at all the significant risks of error in the return, and possibly any accounts supporting the return. Whereas an aspect enquiry concentrates on just one or a few aspects of it.

HMRC have a limited time in which to commence an enquiry into a tax return, and this is twelve months after the day on which the return was delivered or filed with HMRC. However, if the return is submitted after the filing deadline then enquiry deadline is extended by three months to the next quarter-day.

WHAT ARE THE RISK FACTORS WHICH MAY LEAVE YOU OPEN TO ENQUIRY?

1       Failure to submit Tax Returns and pay your tax on a timely basis.

2       Mistakes on a return and the need to submit several amendments.

3       Estimated figures, which keep the enquiry window open.

4       Omission of income, such as taxable benefits reported on a Form P11D and bank interest.

5       Omission of the high income child benefit charge where a parent has total income in excess of £50,099.

6       Failure to report a capital disposal and resulting capital gains tax liability, such as the sale of a buy to let property.

7       Absence of private use adjustments for expenses claimed by the self-employed.

8       Cash based businesses; takeaways, builders and taxis.

9       Questionable employment status.

10    Absence of a ‘white space note’ on the Tax Return to explain specific claims for relief.

11    Making gross pension contributions in excess of the annual allowance for the tax year and allowances carried forward from the three prior tax years) and not paying the Annual Allowance Charge.

12    Failure to make elections, such as electing a property as a Principal Private Residence.

HMRC’S ENQUIRY TARGETS

Campaigns and Taskforces give the biggest clues as to where HMRC see a widespread compliance risk. The Let Property Campaign is encouraging people with undeclared rental income to come forward, and this enables taxpayers with undeclared rental income to ‘come clean’ and declare rents with minimal penalties, under a civilised amnesty provision.

HMRC have recently launched ‘hidden wealth’ Taskforces targeted at people suspected of living beyond their means, based on their declared assets to HMRC.

CONSEQUENCES & PENALTIES

Up to 100% of the unpaid tax and late payment interest. In the most serious cases for deliberate tax evasion, the taxpayer could be named as a tax evader or even face criminal prosecution which could result in a jail sentence.

The penalties are calculated on a published scale which takes into account the behaviour of the taxpayer. The penalty is significantly higher if the failure to disclose is deliberate, and even higher if there is an attempt to conceal the lack of disclosure. Typically, the penalty will amount to another 35%-100% of the unpaid tax.

Whilst penalties can be up to 100% of the tax due, in practice they will most likely be less than this, depending on the circumstances. In some cases a penalty may be completely mitigated or could range between 10-30% for small inaccuracies and anomalies without intent, and this may be on occasions where there is a small amount of carelessness by the taxpayer.

By way of example, an inadvertent mistake where it can be demonstrated that the taxpayer took reasonable care will not receive a penalty, and carelessness, such as the omission of P11D figures could thus receive a suspended penalty.

FEE PROTECTION INSURANCE  

Fee protection insurance is broadly insurance against the professional costs involved with dealing with an enquiry on the taxpayer’s behalf, such as accountancy fees. Insurance is particularly important for those taxpayers who are potentially at a higher risk of a HMRC enquiry.

Fee protection insurance will not prevent an HMRC enquiry. However, it does provide comfort to taxpayers that, if an enquiry is opened, they can be represented by a suitably experienced professional, without the worry of bearing the related costs. The insurance can cover not only accountancy fees, but also technical advice and a second opinion from the insurers in-house specialists.

FUSE offer a thorough fee protection insurance backed by Croner Taxwise for our clients and if you would like more information on this, you can find this here.

 RECORD KEEPING & SOFTWARE

Individuals should keep their records for 22 months after the end of the tax year. The self-employed and partnerships should keep their records for at least 5 years from the end of the tax year. Completion statements for the acquisition and disposal of buy to let properties and contract notes for share disposal should be kept for the period of ownership plus the enquiry window.

For the self-employed and landlords an online accounting app may help simplify recordkeeping.  There are many accounting packages available and FUSE can help you decide and set up what would suit you best.  For sole trader, there is simplified solution called 1Tap that you may find useful and you can click here to read more about this on our website.  We also offer more comprehensive cloud accounting packages that can ensure better recordkeeping, which meet with HMRC requirements. If you would like to discuss this further, please do arrange a call.

Anecdotally, using an accountant to file a Tax Return reduces the risk of a tax enquiry. This is because the return has a reduced likelihood of errors, omissions, and unexplained transactions.  For further advice look no further than the experienced tax advisors at FUSE Accountants. We have combined experience of over 50 years and are more than happy to help.

FUSE is an independent Chartered Certified firm of accountants and tax advisors based in Highgate Village, North London. We provide a dynamic range of services to clients working in property, media, entertainment and professional services. Our clients vary in size from self employed sole traders, small enterprises and medium size businesses. We believe that comprehensive financial planning and sound business financial advice are the keys to growth and profitability.