Out-Law Guide | 12 Nov 2015 | 3:39 pm | 4 min. read
It is important to know your rights and obligations in a tax investigation. Here are some of the questions you might ask in the early stages of an investigation by UK tax authority HM Revenue and Customs (HMRC).
Why is HMRC enquiring into my tax return?
HMRC can launch tax investigations into tax returns on a random basis to check that tax returns are correct. However random investigations are reasonably uncommon. It is more likely that HMRC have information which leads them to believe that your tax return is not correct.
How long after I have filed my tax return can HMRC start an enquiry?
Typically HMRC has 12 months from the date they receive your tax return to start an enquiry. However this might change under the 'discovery' provisions if returns are late or amended or contain deliberately misleading information.
Who will HMRC notify if I am under investigation?
HMRC will only notify the taxpayer and any agent who is known to it who is under tax investigation. However, if you are found to have evaded tax of more than £25,000 HMRC may ‘name and shame’ taxpayers on the HMRC website.
How long will a tax investigation take?
The length of a tax investigation depends on the complexity of the case and the number of documents being reviewed. Careful management of the investigation is effective at reducing the time spent under enquiry.
Will I go to prison?
HMRC can launch a criminal investigation with a view to prosecution in respect of tax evasion. However a prosecution is extremely unlikely to happen if you make a full and frank disclosure about any tax irregularities you may have during a tax investigation. If you lie or only tell part of the truth during an investigation then HMRC may look at proceeding with a criminal investigation.
Will I have to meet HMRC?
There is no legal obligation for you to attend a tax investigations meeting, although HMRC will usually seek a meeting in Code of Practice 9 and Section 144 tax investigations. In most situations we do not let HMRC meet our tax investigations clients, although it may on rare occasions be appropriate.
How many years can HMRC investigate/seek tax for?
In cases where it believes that the failure to pay the right amount of tax is deliberate HMRC can request records and seek tax for the past 20 years. If you cannot locate the records, HMRC can make estimated assessments for additional tax which may be considerably in excess of the amounts which are likely to be correct. However, we understand that records are not always available and can agree with HMRC other ways of reaching an appropriate conclusion on what taxes have been underpaid.
HMRC wants to investigate my affairs. Does that mean I have done something wrong?
Not necessarily. This may be a random check or it may be that HMRC has incorrect information or has misunderstood information held.
I am under investigation – what do I do now?
Keep calm and don't panic - HMRC will give you a chance to explain. Even if there are irregularities in your tax affairs, with proper professional advice all is not lost - very few investigations end in a custodial sentence.
Get expert help at the outset - HMRC itself suggests that taxpayers obtain proper professional advice. It is important to have someone who understands how HMRC operates. Taxpayers should be aware that expert advice can reduce their tax bill, negotiate suspension of a penalty or, in the worst case scenario, save them from prison. The adviser will also minimise their client’s personal involvement in the procedural aspects – other aspects of their lives still need their time and attention during the course of an investigation. It is also likely to be cheaper in the long run.
Don't discuss your tax affairs with anyone but your tax advisers - firstly it is almost certain that what your friends advise you will be misguided and therefore detrimental to your chances of reaching a settlement with HMRC and secondly HMRC receives ‘whistleblowing’ calls from a wide range of informants, including former spouses or friends, ex-employees and competitors.
Tell the truth - taxpayers should never lie to HMRC. If you are found out it can increase the likelihood of a prison sentence. Also, don’t assume that HMRC is ignorant of anything. It receives and assimilates information from a wide variety of sources, including other government agencies, surveillance operations and international exchanges of information.
Be well prepared for any meetings - insufficient preparation will not allow you to evade the questions, the investigator will simply use his statutory powers to force you to give him the answers he seeks and your lack of preparation will be deemed to be "lack of co-operation".
Don't destroy evidence - if you don't have the appropriate records, HMRC may assume you are trying to hide something when you are not. It is also illegal and you could be criminally investigated or fined for doing so.
Never make a partial disclosure - this will be considered to be a ‘lack of co-operation’ and is likely to lead to a more punitive settlement or worse subjected to a criminal investigation.
How soon do I need to provide HMRC with the relevant information?
In normal cases you will be given 30 days to provide the supporting information, but you can request an extension if this is unreasonable.
What penalties are involved in tax investigations?
If errors in tax returns are deliberate or due to carelessness, they will attract penalties. These are calculated as a percentage of the extra tax due and are based on the behaviour of the taxpayer.
There is no penalty for someone who took reasonable care but who submits an incorrect return. But it will be treated as careless, if they later discover an error but fail to tell HMRC.
There will be a penalty of 15-30% of the tax due if the error is careless and the disclosure of the error is prompted.
The penalty will be 35-70% of the tax due if the error is deliberate and the disclosure of the error is prompted
The penalty will be 50-100% of the tax If the error is deliberate and has been concealed and if the disclosure is prompted.
There are reductions in each of the above categories where penalties apply if disclosure of the error is unprompted.
Where offshore tax matters are involved, the maximum penalty is 200% of the tax due, unless the funds have been moved to avoid them being reported under FATCA/CRS where an additional 50% penalty can be charged.