Income Tax Investigation

What is an Income Tax Investigation?

Tax investigations, whether they be HMRC compliance checks, income tax investigations or otherwise, are very stressful and difficult for the person under enquiry.

HMRC tax compliance investigations come in a manner of different guises and from different offices, but they will commonly explain that they are conducting some form or check into your records whether you are an individual, company or trust.

There are several areas into where a HMRC compliance check (both individual and small business compliance) could be launched which include:

• VAT
• Income tax relating to self-employment
• Income tax relating to partnerships
• Income tax and investments relating to individuals
• Income from property
• Car and fuel benefits
• Dividends shown (or not shown) on tax returns
• Capital gains tax
• Corporation tax
• Pay as You Earn (PAYE)
• National Insurance
• Minimum wage
• Stamp duty land tax
• Tax planning (or tax avoidance as HMRC prefer to call it)
• Contractual Disclosure Facility under Code of Practice 9

There are other more specialised tax investigations but these are mainly relating to big corporate clients and very specialist areas of business.

What happens in a HMRC Compliance Check

The first thing that a person will know about the income tax investigation is either when they receive a HMRC compliance letter from HMRC explaining they are undertaking a compliance check and with a schedule of information that HMRC believe they need to test the tax affairs.

When we are presented with such a letter, the first thing we check is that the notice has been validly issued. It is not unknown for HMRC to send someone a notice of tax enquiry which is outside of the period in which the law allows, or to have made some other error in issue. If the notice is invalid, then technically HMRC should close their enquiry.

HMRC will often ask for a significant amount of information with the tax enquiry letter. This also needs to be given due consideration as it often asks for items which technically HMRC are not entitled to. For HMRC to be entitled to information it should be reasonably required to test the tax position they are allowed to check. The first failing is usually to ask for information outside the year that they are checking.

Thus, careful consideration by people who understand what HMRC can and cannot have can result in restricting the amount of information that the person subject to the tax enquiry needs to obtain and thus saves them time and effort. An additional benefit of not supplying information to which HMRC are not entitled is that it can be guaranteed that HMRC will ask questions about the information they should not have received which will result at best in having to deal with lots of unnecessary questions.

Supplying HMRC compliance information

The next key point of a tax enquiry is keeping control. Often people and accountants gather together whatever information is asked and just post it to HMRC. It is important that before the information is sent that it is reviewed and it is also helpful to enclose schedules showing how this information leads to the figures in the tax returns and accounts. In cases where Gilbert Tax have become involved at a late stage when matters have got somewhat fraught, it is often the result of misunderstandings of the information by HMRC which has been caused by a lack of thought in how the information is presented.

It is important that, if there are errors in the tax affairs, that these are brought to HMRC’s attention at an early stage.

If the matter is technical in nature (say whether a car is a pool car or there should be a benefit in kind on an individual) then this requires both the evidence and the technical arguments setting out to HMRC. Our experience in most technical matters is that HMRC have slanted views and will either misrepresent evidence or only look for information that supports their view that the tax position taken is incorrect. Thus, early intervention is of utmost importance and ensures that the right technical points and evidence are considered.

If there is any further tax due, then the tax enquiry will be concluded. The law states that there is presumption of continuity (that is if it has happened in one year it will happen in another) and careful consideration needs to be given to show why this was not the case or to restrict the matter as far as possible.

Level of penalties

With regards to the number of years HMRC can go back it depends on the behaviour of the individual. If they have taken reasonable care it is 4 years from the end of the year of assessment in which the agreement is reached, if careless it is 6 years and where someone did something deliberately then it is 20 years. Needless to say, HMRC's belief of what is deliberate varies significantly from what the law actually says and HMRC often forget that they have to prove that at the time someone signed their tax return they knew it was incorrect.

Our experience is that the matter of behaviour needs to be considered from the beginning of a tax enquiry and needs working into dealings with HMRC right from the beginning.

The level of penalties also depends on behaviour and whether people have cooperated with HMRC and brought any errors to their attention. There is a significant difference between co-operating with HMRC and doing exactly what they want, and again this is where the proper handling of a tax enquiry can make a massive difference.

Income Tax Investigation experts

Gilbert Tax’s experience is that HMRC are getting much more aggressive and sadly compliance checks are being undertaken by officers of HMRC tax compliance who do not really understand the law and are badly supervised. It is therefore imperative that if someone is subject to a tax investigation that they seek the advice of someone who has significant experience of how to deal with HMRC and what the law is relating to HMRC's powers.