How To Prevent an HMRC Enquiry
HMRC has a legal right to open an enquiry into a Tax 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 will conduct an enquiry by way of correspondence, meetings and a review of taxpayers records.
The onus is on you, the taxpayer to prove your innocence!
ACT NOW - 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.
A taxpayer has twelve months from the filing deadline to submit an amended return so it is important to make any amendments before HMRC get to you first, within the time fame. You can usually amend the previous years’ Tax Return in the same way that you filed it, ie if online, the amendment should be made online.
Errors in a return should be made by either amending a Tax Return online or in writing and if an overpayment has occurred for earlier years, this should be declared in writing by making a claim for ‘overpayment relief’ within four years of the end of the appropriate tax year.
REASONS TO PREVENT A TAX ENQUIRY
1. Tax enquiries can be expensive as not only can the outcome result in more tax, interest and penalties, but additional fees too.
2. Enquiries can be stressful and intrusive.
3. An enquiry can disrupt a business’s activities and leave uncertainty.
4. Tax enquiries are time consuming and can drag on for months and even years.
ENQUIRY TYPE
An enquiry may be ‘full’ or ‘aspect’. In a full enquiry, HMRC broadly look at all the significant risks of error in the return. An aspect enquiry concentrates on one or more aspects of it. HMRC have a limited time in which to commence an enquiry into the tax return. 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 the enquiry deadline is extended by three months to the next quarter-day.
RISK FACTORS
There are some typical areas of risk and here we summarise the top risks;
1 Failure to submit Tax Returns and pay your tax on a timely basis can result in late filing penalties and surcharges on late payment.
2 Mistakes on a return and the need to submit several amendments at a later date can raise alert to HMRC.
3 Estimated figures leaves the enquiry window open longer than necessary.
4 Omission of small amounts of income, such as benefits reported on a Form P11D and bank interest can often trigger enquiries of greater hassle.
5 Omission of the high income child benefit charge where a parent has total income in excess of £50,099 is often a big cause of enquiry.
6 Failure to report a capital disposal and resulting capital gains tax liability, such as the sale of a buy to let property will be an easy win for HMRC as they can obtain information from the Land Registry.
7 Absence of private use for expenses claimed by the self-employed can imply you haven’t considered any duality of purpose, eg;
Mobile phone use
Motor running costs
Travel costs where an Oyster card has been used for all business and private journeys
8 Cash based businesses; such as takeaways, builders, construction workers, and taxis are frequently scrutinised and targeted by HMRC.
9 Questionable employment status where HMRC believe an employment contract should have been in place.
10 Absence of a ‘white space note’ on the Tax Return to explain specific claims for relief meaning you’ve not given full disclosure where it is warranted.
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 can result in contentious outcomes later.
13. Valuations use on a return form with no back up claim or pre-agreement made with HMRC.
ENQUIRY TARGETS
Campaigns and Taskforces give the biggest clues as to where HMRC see a widespread compliance risk. For example The Let Property Campaign is encouraging people with undeclared rental income to come forward and disclose income within an amnesty type arrangement, minimising penalties for those who self-disclose.
HMRC have recently launched ‘hidden wealth’ Taskforces targeted at people suspected of living beyond their means, based on their declared assets to HMRC.
It is worth noting that HMRC are known to recruit accountants to understand more of the mindset of the taxpayer and to know where to target enquiries.
CONSEQUENCES & PENALTIES
Penalties can be 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. But in some cases in the case of error, penalties may be reduced to nil or anywhere up to 30%.
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, in this case, the penalty will amount to another 35%-100% of the unpaid tax.
While penalties can be up to 100% of the tax due, in practice they will usually be less than this, depending on the circumstances. 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 receive a suspended penalty if there are no other anomalies and a taxpayers tax affairs remain correct in the coming years.
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.
RECORDKEEPING & 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 6 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, as well as details of any associated costs.
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 a sole trader, there is simplified solution we use called 1Tap that you may find useful and you can click here to read more about this on our website. If you would like to discuss this further, please do arrange a call. We also offer more comprehensive bookkeeping solutions such as QuickBooks and Xero so ask us about our accounting packages.
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.