Corporation Tax Investigation

Corporation tax investigations explained

Corporation Tax Investigations are described as compliance checks in HMRC literature. These compliance checks are conducted by tax inspectors whom normally have years of training to enable them to deal with companies.

In order to deal with Corporation Tax Compliance Checks the tax inspectors often have to have years of training and pass rigorous examinations.

HMRC only conduct compliance checks when they have identified a risk. That is that they believe that further tax may be due and that the best way to check this is by a corporate tax compliance check.

Generally corporate tax compliance checks are conducted into the last tax return that has been filed and the compliance check should be notified to the company within 12 months of the date the tax return was filed.

In order to start a corporate tax compliance check HMRC should send a notice in writing to the company at its registered office and the letter should make it clear that HMRC are conducting a compliance check into the tax affairs of the company.

The compliance check should relate to the company only and not its directors. If HMRC want to enquire into the tax affairs of the directors they should open separate income tax self assessment compliance check.

Types of Compliance Check

Corporate tax compliance checks will basically fall into two categories:

• A full corporate tax compliance check where HMRC look at all of the business records for a whole year
• An aspect corporation tax compliance check where HMRC look at one or two aspects of the companies tax affairs such as entertaining or travel and subsistence

An aspect compliance check can turn into a full corporate tax investigation in certain circumstances and this change should be made clear. If this happens it is a clear sign that HMRC believe that there are serious issues with the company’s tax affairs.

It is possible that at the same time as HMRC conduct corporation tax compliance check they also conduct a VAT compliance check and a PAYE compliance check but these are in effect separate tax investigations and it should be made clear that HMRC are also looking into these matters.

HMRC have published guidance on the conduct of a corporate tax compliance check and this is here.

What to expect

As part of the compliance check HMRC may wish to meet with the directors and the accountant. It is not compulsory to have a meeting with HMRC. That is not to say that as part of a compliance check a meeting with HMRC should not occur but it should always remember that this is a tax investigation because HMRC believe that there may be something wrong with the accounts which could lead to additional tax being due. Preparation for any meeting is important and should be assisted by someone who has experience of compliance checks. HMRC will make notes of the meeting and we have seen many instances where ill thought out answers, or misrepresentation of what was said in the notes has led to massive problems during the enquiry.

HMRC are entitled to look at the business records supporting the tax returns and nothing else, however their information requests often go way above and beyond what they are legally entitled to. Thus the starting point for any compliance check is to satisfy yourself that HMRC entitled to ask for what they are requesting.

If for any reason the tax returns submitted are known to be incorrect then it is important to disclose this at the earliest given opportunity to your advisor or speak to someone whom specialises in tax investigations. Early disclosure of tax evasion or errors can help your advisor manage the tax investigation and lower the level of any penalty that will be charged.

If errors are found during the corporation tax enquiry HMRC will often assume that similar errors have occurred in other years and wish to make adjustments for these years as well (and charge interest and penalties). Many errors found as part of corporation tax compliance checks can also effect the tax affairs of the directors.

That is not to say that errors will be found in all compliance checks and if there are no errors then HMRC should close down their compliance check. Major issued can arise where HMRC have decided there are errors and none exist. This is why it is important to ensure that the compliance check is managed by someone with experience of dealing with tax investigations.