Each year, HMRC randomly select a number of tax returns to investigate, to ensure compliance in taxpayers reporting their tax. This has long been the case and is something that every business should be aware of, but this year the chances of being subject to an investigation are bigger than ever.
As a result of the coronavirus pandemic, the UK economy has been badly overstretched. The public purse in nearing empty resulting in the Government and HMRC declaring that they are going to look very closely at those companies that have taking advantage of the tax breaks and Government subsidies that have been paid out in their tens of billions to help keep the economy afloat.
HMRC has responded to these targets with a proactive approach designed to home in on those that they believe may not be declaring their tax accurately.
Whilst there is nothing for you to worry about if you are targeted by HMRC, as long as you are declaring your tax correctly to the best of your knowledge, it does takes time to respond to the questions posed in an investigation, so be prepared to set aside a significant amount of time to deal with it.
In the unfortunate event that HMRC do impose fines, then it is vital that you stay calm and not accept as true everything that they say. HMRC frequently make mistakes in their calculations, as well as in their interpretation of tax law, so before you agree to anything it is vital you consult your accountant to see what your options are.
Fee protection is a form of insurance that you can take out to secure yourself against an HMRC compliance check. The insurance will pay for your accountant and any work time you miss because of dealing with the enquiry, and most insurers will also provide you with dedicated professional help, dealing with HMRC on your behalf so that you don’t need to worry or be distracted with it.
This blog will discuss how HMRC investigations work, and why fee protection is important for any business.
HMRC has the power of investigation over a wide range of taxes and sectors. You may be called to respond to an enquiry for a whole host of reasons, including:
A full HMRC enquiry into your accounts or tax return. This could be a random enquiry, or one triggered by something, such as figures that don’t add up on your tax return
A dispute from a VAT or PAYE inspection
An IR35 investigation
Enquiries raised by one of the HMRC task forces
‘Interventions’, a new form of enquiry that allows HMRC to inspect businesses and their records
Cross tax enquiries – where VAT, Income Tax, Corporation Tax and PAYE are investigated and cross-referenced
Information provided by HMRC intelligence – specifically HMRC Connect
The HMRC Connect system, dubbed the ‘snooper computer’ by some, was first launched in 2017 as a high-tech way to analyse tax returns.
The technology is designed to quickly and efficiently identify those whose spending habits do not match the information that they report in their tax return. Instead of just relying on the information that people readily provide, the Connect system is able to take information from other sources including government and corporate sources, as well as people’s personal social media profiles, to get a true picture of an individual’s annual expenditure.
If there appears to be a disconnect between the amount of money a person claims to earn and the amount that they are spending, they may be flagged and become subject to an investigation.
What Information Can HMRC Access?
HMRC has been allowed access by a wide range of sources, including banks and lenders and the Land Registry (in order to see property purchases and records). Other sources include:
Visa and MasterCard transactions
UK and overseas bank records, from banks in more than 60 countries
Internal tax records such as council tax and VAT
DVLA for information about any vehicles owned and purchased
Online platforms including Airbnb, eBay, Gumtree etc
Web browsing and emails: HMRC were given powers to look at digital activity in the Investigatory Powers Bill, passed into legislation in 2016
Social media: Public Facebook, Twitter and Instagram posts may be used
HMRC Connect offers investigators a huge advantage, allowing them to gather information in moments that would have taken them months to collect in person.
What Happens During A Compliance Check?
If you are targeted for a compliance check, they usually conform to the following procedure:
You will receive a letter from HMRC requesting further information as evidence to support the tax return that you last submitted.
You (or your accountant) compile this information and then send it back to HMRC in the timescale requested.
HMRC review the evidence that you have provided, and then either close the investigation, if they feel that the evidence backs up your original return, or ask for further information
If you have been asked for more information then you or your accountant will repeat the process until HMRC concludes that compliance has been achieved, or there has been an error that needs to be rectified.
HMRC will also ask you a number of questions regarding your work, your income and your trading activities. These will all need to be answered in full and to the best of your knowledge until HMRC is satisfied.
If HMRC find what they believe is an error, whether it has been accidental or deliberate, they will take steps to recover whatever taxation they feel is owed, plus penalties (in some cases) and interest.
How Does Fee Protection Work?
To understand why fee protection is important for you, and how it will help you in the event of an investigation, here is an example scenario:
You receive a letter from HMRC saying that your business owes £5,000 in unpaid tax, and requests information to prove that you do not owe this money, or payment in full for the tax owed. You will need to instruct your accountant to look into your accounts and pull any information that you can use as evidence that you do not owe this money.
Your accountant spends £2,000 worth of their time on doing this.
If you are unable to prove that you don’t owe this tax you will then owe £7,000 overall, including your accountant’s fee. If you are successful and HMRC concludes the investigation, you may have nothing to pay to them, but will owe £2,000 to your accountant that you otherwise would not have.
Fee protection insurance ensures that you are able to pay any extra fees without having to go out of pocket. In the worst case scenario you will owe £5000 in total but in the best case scenario you can come out of the investigation without having had to spend any money at all.
Not only does fee protection help you financially, but you will also get:
Full representation in case of a tax enquiry from a professional team that will be better able to fight your corner
A service that deals with tax authorities for you, leaving you to carry on with the day-to-day running of your business.
The ability to negotiate the best possible deal with HMRC, saving you money
HMRC investigations are a fact of life, and the likelihood is there will be many more of them in the coming years due to factors resulting out of the current crisis.
As an example, The Coronavirus Job Retention Scheme is suspected to have been widely abused and there is no doubt that HMRC will thoroughly pursue this and launch large numbers of additional investigations to recoup the payments.
If you have any questions regarding this article and the points raised then please get in touch with An Accounting Gem on 01473 744 700 or email us at email@example.com.
We are here to help you every step of the way.