Tax enquiries

Find out why an HMRC tax enquiry might be initiated and what to do next

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HMRC tax enquiries

HMRC can open an enquiry to check the accuracy of your tax return when they identify one or more risks.

They are usually restricted to a limited timeframe to open an enquiry, typically 12 months from the date the tax return was filed. This period can be extended if the return was filed late.

How long an HMRC tax enquiry can stay open for

When HMRC opens a valid enquiry into a certain period, it remains ‘open’ until HMRC is satisfied that the identified risks have been fully considered and the correct amount of tax has been paid.

In some cases, HMRC enquiries remain open for years. You may find yourself in an entrenched dispute with HMRC where direct negotiation is not successful in resolving the issues. In these circumstances, there are alternative methods of resolution available, such as applying for mediation via HMRC’s Alternative Dispute Resolution (ADR) process or appealing to the Tax Tribunal.

Once HMRC is satisfied that all risks have been properly addressed, a formal closure notice is issued to conclude the enquiry. After a closure notice has been sent, HMRC cannot revisit the same tax dispute provided that all relevant information has been shared with them.

How HMRC identifies risks

HMRC has access to a vast amount of information from multiple sources to help them identify risks, including:

  • Public registers, such as Companies House and Land Registry
  • Sector-specific data to benchmark business’ financial performance
  • Findings from its own investigations
  • Data provided from foreign jurisdictions and financial intermediaries

Over the last few years, HMRC has also invested significantly in advanced software to tie all of this information together, undertake sophisticated risk assessments and identify potential tax issues requiring further investigation.

Tax avoidance enquiries

Participation in a tax avoidance scheme (whether it’s personally or for business) is a common trigger for HMRC to open an enquiry and check whether the arrangements are compliant with UK tax rules.

HMRC describes tax avoidance as bending the rules of the UK tax system to gain a tax advantage that Parliament never intended to occur. Typically, tax avoidance schemes are implemented with contrived or artificial steps that have no commercial purpose. In HMRC’s view, these schemes or arrangements do not work, or at the very least, operate within the letter, but not the spirit, of the law.

Tax avoidance schemes commonly feature structures such as umbrella companies, offshore payroll administration and different types of employee, retirement and remuneration trusts overseas. These include Employee Benefit Trusts (EBTs), Funded Unapproved Retirement Benefits Schemes (FURBSs) and Employer Financed Retirement Benefit Schemes (EFRBSs).

HMRC’s statistics show that tax avoidance arrangements are often targeted towards people who are:

  • Self-employed
  • Contractors
  • Agency workers
  • Public sector workers

HMRC is committed to challenging tax avoidance arrangements and has received additional powers from Parliament to clamp down on companies who market such schemes to individuals and businesses.

This has led to a large amount of correspondence being issued to taxpayers including:

  • Tax enquiries, assessments and information requests
  • General anti-abuse rule (GAAR) notices
  • Accelerated payment notices (APNs)
  • Follower notices (FNs)
  • Partner payment notices (PPNs)

How Evelyn Partners can help with your tax enquiry

HMRC enquiries can be distressing, particularly because it can be uncertain how long it will take to close the enquiry and the extent of checks to be undertaken. Navigating through the paperwork can be a confusing and time-consuming exercise, especially as any associated tax litigation can involve multiple tax appeals and take many years to conclude.

At Evelyn Partners, we have an experienced team of tax experts who can:

  • Review any existing arrangements
  • Help you to understand and navigate HMRC’s enquiry process
  • Work with you to establish the facts and gather the relevant evidence to support your position
  • Advise on the options available to you and the most appropriate way to move your case forward to resolution in a timely manner
  • Potentially settle any outstanding tax, interest and penalties with HMRC

For more information, speak to one of our team today.

Frequently asked questions about tax enquiries

What is the difference between tax avoidance and tax evasion?

Tax evasion is when you knowingly fail to pay or wilfully underpay on UK tax. It is illegal and can lead to criminal prosecution.

Tax avoidance is when people ‘bend’ the law or put arbitrary arrangements in place with no commercial purpose other than to achieve a tax advantage.

How far can HMRC look back during a tax enquiry?

When you submit a tax return, HMRC typically has 12 months from the date a tax return was filed to open an enquiry. This is called an ‘open year’.

In certain circumstances where HMRC discover an issue that wasn’t fully disclosed, they can look back further than this and raise an assessment for additional tax. Broadly speaking, these assessments can be raised:

  • Four years from the end of the relevant tax period
  • Six years from the end of the relevant tax period when the error has arisen from careless behaviour
  • 12 years from the end of the relevant tax period when the error relates to an offshore asset
  • 20 years from the end of the relevant period when the error has been caused by deliberate behaviour

If you have not filed a tax return, HMRC can raise a determination (an estimate of the amount of tax that should have been paid), for a 20-year period, unless you have what HMRC deems to be a reasonable excuse, which restricts the window to four years.

Is additional tax always payable when an HMRC tax enquiry is closed?

Where HMRC identifies and queries potential tax risks, this does not always mean that additional tax is payable as there may be genuine reasons to support the position within the filed tax return. It’s important to remember that the purpose of the enquiry is for HMRC to probe risks further and to establish whether the correct amount of tax has been paid at the right time by the right person.

What happens if an HMRC enquiry shows the correct amount of tax was not paid?

Once any underpayment of tax has been determined, HMRC will consider why the mistake or omission arose and whether this may have similarly affected the tax position for earlier ‘closed’ tax years.

If HMRC has reasonable grounds to suspect there has been an underpayment of tax in earlier years, they have wide-ranging powers that enable them to look into these earlier years, ask for further information and potentially take formal action to collect the additional tax. HMRC can apply penalties of varying percentages in addition to the tax and late payment interest due, which will depend on the behaviour that has led to the underpayment of tax and the level of cooperation with HMRC during their enquiries.

This information is for UK residents only.

If you are a US-connected client of Evelyn Partners, see our US website.