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February's round up of the latest tax investigation news and cases:
Roscoe Noonan, a second-hand car dealer, faces a £600,832 VAT bill after HMRC determined that he failed to keep accurate sales records over a 10-year period from 2008 to 2018. Despite his claims of lost documentation due to a flood, HMRC proceeded with the assessment under section 73 of the VAT Act 1994, arguing that Noonan had suppressed sales and failed to meet his tax obligations.
The investigation initially began with Noonan’s declaration of £39,581 in sales for the 2011-12 tax year. When HMRC raised concerns, his accountants, Jackson Feldman, revised the figure to £80,623. In 2014, HMRC offered Noonan the chance to make a full disclosure under the Contractual Disclosure Facility (CDF), which he accepted in November of that year. Noonan admitted to underreporting profits and avoiding VAT registration, stating, “Since approximately April 2008, I have not included in the takings of my car dealing business a number of car sales and purchases.” He further admitted to excluding certain bank transactions that he had falsely labeled as gifts from family and friends.
Despite making this initial disclosure, Noonan later refused to cooperate with HMRC’s ongoing investigation. He changed accountants several times, moving from Jackson Feldman to Gerald Edelman and later to Grant Whittaker & Co. However, inconsistencies in his financial reports persisted. HMRC officer Richard La Roche, who led the investigation, found that Noonan had failed to maintain a proper stock book or adequate records of transactions, which disqualified him from using the second-hand margin scheme, a VAT mechanism that allows dealers to pay tax on their profit margins rather than total sales.
The second-hand margin scheme has strict rules, which Judge Rachel Gauke explained during the tribunal: “There are strict and precise rules for using this scheme. Without proper stock records, it cannot be applied.”
Between 2008 and 2014, Noonan purchased most of his cars through West Oxfordshire Motor Auctions (WOMA). HMRC’s investigation revealed that Noonan’s account at WOMA had also been used by two associates with his consent. An email from WOMA confirmed this, stating, “A long period of time [existed] when two other people were using your trade account with your consent.” However, Noonan argued that these purchases should not be counted in his VAT assessment because they were for personal use or on behalf of his associates.
Noonan’s failure to provide sufficient evidence for his claims became a central issue. He insisted that many of the cars purchased were not for resale, and that refunds from his associates were reflected in his bank statements—though these statements were not submitted as evidence. Additionally, he claimed that a significant portion of the sales included costs for vehicle preparation, such as MOTs, mechanical repairs, and advertising, which HMRC allegedly overlooked.
La Roche calculated that Noonan had an average profit margin of 83.49% per car, leading to a net VAT liability of £601,188.69. Noonan disputed this figure, claiming that HMRC had overestimated the profits and ignored key costs associated with car resale. Judge Gauke agreed to one adjustment, directing HMRC to reduce the estimated percentage of part-exchange sales from 25% to 5%, based on Noonan’s argument. However, the judge dismissed the rest of the appeal, stating, “We are satisfied on the evidence that Mr Noonan had ample opportunity, extending over many years, to provide figures which he considered more accurately represented his true liability.”
The tribunal emphasized that Noonan’s situation was the result of his failure to meet the disclosure requirements under the CDF. His inconsistent cooperation and incomplete documentation led HMRC to rely on a “best judgement” assessment, using data from WOMA and an average sales price of £1,500 per car to calculate the final VAT liability.
Ultimately, Judge Gauke upheld most of HMRC’s assessment, underscoring the importance of accurate record-keeping and compliance when participating in the second-hand margin scheme. The case highlights the risks that arise when businesses fail to maintain proper financial records and cooperate with tax authorities.
HMRC has introduced a new voluntary disclosure platform designed to tackle inaccurate or overclaimed research and development (R&D) tax relief. The platform, which opened on 1 January 2025, provides companies and their agents with an avenue to notify HMRC of incorrect historical claims when they are no longer able to amend previous tax returns. The initiative comes in response to widespread concerns over speculative or baseless claims made by intermediaries, a practice that has cost the UK government an estimated £1 billion in lost tax revenue.
R&D tax relief has been a major focus of HMRC’s compliance activities, with many claims under scrutiny for being inflated or unjustified. Under HMRC’s previous “pay now, check later” approach, some intermediaries submitted questionable claims, often benefiting themselves while leaving clients exposed to penalties and liability. HMRC’s new platform seeks to provide a route for companies to correct mistakes made innocently or carelessly, distinguishing such errors from deliberate inaccuracies, which must be dealt with separately through the Contract Disclosure Facility (CDF).
When a company voluntarily discloses an incorrect claim through the new platform, it is expected to fully cooperate and enter into a contract settlement with HMRC to resolve the issue.
Companies using the voluntary disclosure platform will still be required to repay any tax owed, including interest and penalties. However, the key incentive for many businesses is the potential reduction in inaccuracy penalties. For careless errors, penalties can reach as high as 30% of the unpaid tax, but early and unprompted disclosures can result in significant mitigation, and in some cases, the penalties may be reduced to zero. This reduction recognizes the taxpayer’s cooperation in identifying and rectifying the issue without prompting from HMRC.
The platform is particularly beneficial for companies that have only recently discovered errors in their claims or those whose agents may have submitted inaccurate information on their behalf. Before making a disclosure, companies are advised to thoroughly review their position to ensure that the claim was indeed erroneous.
Although the disclosure platform presents an opportunity for businesses to address past mistakes, careful consideration is necessary. The R&D tax relief regime has seen extensive litigation, particularly around HMRC’s interpretation of “subcontracted” R&D expenditure. Many cases have ended in tribunals rejecting HMRC’s strict interpretation, demonstrating that some claims previously under dispute may be fully justified.
Taxpayers who believe they may have been victims of mis-selling or poor advice from their agents are encouraged to seek legal or professional advice before entering into any settlement with HMRC. There are strict time limits for seeking redress from advisers, making it crucial to act quickly if any negligent advice is suspected.
While HMRC’s new disclosure platform aims to recover lost tax revenue and deter inaccurate claims, it also reflects an understanding of the complexities surrounding R&D claims. Companies that have been caught up in this crackdown—whether due to innocent errors or misleading advice—now have a pathway to correct their position, reduce penalties, and potentially avoid further legal or financial consequences. However, this process must be handled strategically to ensure that businesses are not unfairly penalized for legitimate claims or misinterpretations of the law.
By providing a structured avenue for voluntary disclosures, HMRC aims to strike a balance between recovering lost revenue and offering companies a fair chance to rectify genuine mistakes, fostering a more compliant and transparent tax environment.
Over recent years, HMRC has increasingly used “nudge letters” as part of its compliance strategy. These letters are sent to a large number of taxpayers, prompting them to confirm that their tax affairs are in order. By issuing these “one-to-many” communications, HMRC can cost-effectively encourage voluntary compliance without needing to initiate a formal compliance review or investigation.
Nudge letters have been sent in relation to various tax matters, including partnership income, offshore gains, foreign tax credit relief, and, most recently, crypto assets. This month, HMRC appears to be focusing on taxpayers who may have undisclosed gains from cryptocurrency transactions, warning of potential capital gains or income tax liabilities. The letter reminds recipients that failure to report such income could result in interest charges and penalties.
Receiving a nudge letter may cause concern for many taxpayers, who often wonder if they have done something wrong to warrant such attention. However, it is important to understand that a nudge letter is simply a prompt, not an indication of wrongdoing or the beginning of an investigation. The letter carries no statutory obligations and does not require any immediate response. It serves as a reminder for taxpayers to review their financial records and ensure full compliance.
Contrary to what some believe, ignoring a nudge letter does not increase the likelihood of HMRC initiating an investigation. Taxpayers have the option to either respond or not, based on their personal circumstances. The decision to respond should not be driven by fear of enforcement but rather by a desire to confirm compliance.
For those who receive a nudge letter, the best course of action is to use it as an opportunity to double-check their tax affairs. Accountants and advisers play a crucial role in guiding clients through this process. Clients should ensure that all relevant assets and income have been disclosed and that their tax filings are accurate. If no discrepancies are found, taxpayers may choose to either ignore the letter or respond to HMRC, confirming that everything has been reviewed and is in order.
However, if potential errors are identified, careful consideration is required. In such cases, it is advisable to conduct a thorough review of the situation and develop a plan to rectify the issues. Simply acknowledging the error in a response to HMRC may not be the best approach. Instead, taxpayers should work with their advisers to determine how best to correct the problem.
If errors are found, there are several options available, including amending the relevant tax return or making a voluntary disclosure to HMRC. A voluntary disclosure can be made online, depending on the type of tax involved. It should clearly explain the nature of the error, how it occurred, and the steps being taken to prevent similar issues in the future. Making a voluntary disclosure can significantly reduce any penalties that might otherwise apply and gives taxpayers greater control over the process.
In contrast, failing to address the situation could lead to more serious consequences if HMRC later opens a formal investigation. In such cases, HMRC is likely to apply the maximum available penalties, leaving taxpayers on the defensive. Navigating an investigation can be stressful, with tight deadlines and extensive requests for documentation from HMRC. Entering discussions with HMRC fully prepared and aware of potential outcomes is always preferable to reacting under pressure.
HMRC’s use of nudge letters reflects a shift toward encouraging voluntary compliance rather than relying solely on formal investigations. For taxpayers, these letters are an opportunity to ensure their affairs are in order without the immediate risk of penalties or enforcement actions. However, where issues are discovered, timely and proactive measures can help mitigate financial and legal risks. By taking a considered approach and seeking professional advice where needed, taxpayers can avoid more serious complications down the line.
Your first step should always to seek specialist tax investigation advice from experienced consultants who can advise you on the best course of action before engaging with HMRC.
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