HMRC Compliance Check
HM Revenue & Customs (HMRC) has the power to investigate the tax matters of all taxpayers and appears increasingly willing to use this power to collect money for the government. HMRC Compliance Check is a formal investigation into your tax matters.
The latest figures indicate that the number of enquiries initiated by HMRC in the year 2011-12 doubled to 237,215 with the proceeds of HMRC’s compliance efforts totalling £16.7 billion.
HMRC’s fundamental line of enquiry is by way of a compliance check, which despite its name is a formal tax investigation. The initiation of the investigation is by way of an Information Notice, which needs the taxpayer to deliver answers to the questions raised by HMRC. A compliance check is different from an enquiry into a tax return submitted by a taxpayer.
To begin a compliance check HMRC must have a cause to suspect that tax has been underpaid. A compliance check cannot be a ‘fishing expedition’.
Why there is an increase in compliance checks?
Part of the reason for the increase in compliance checks is that HMRC has developed their analysis of the data they receive from third parties – such as banks with details of the accounts held by an individual. HMRC are also now gathering more information on property sales, so more checks following the sale of a property can be anticipated.
A substantial amount of the information received by HMRC will not have all the essential details to determine whether tax has been underpaid.
For example, a bank account may be in the name of a grandparent but the money is kept aside for the benefit of a grandchild. From the initial information held by HMRC, it appears that the grandparent has undeclared income and therefore it would be rational to launch a compliance check. The compliance check may then be dealt with quite quickly by replying to HMRC that the interest received on the bank account, in fact, belongs to the grandchildren and providing proof to support the assertion.
Where it leads to if a compliance check determines that tax has been underpaid?
If a compliance check does end in a finding that tax has been underpaid then HMRC will accumulate the tax by issuing an assessment. In addition to any tax payable, the taxpayer may also face penalties for late payment. In addition, HMRC can charge added penalties for non-disclosure of taxable income or gain. The non-disclosure penalties can get decreased for co-operating with HMRC and supplying the reason why the income or gain was not originally conveyed to HMRC.
The late payment and non-disclosure penalties can surpass the actual tax payable.If tax should have been paid on a mean of income for the tax year ended 5 April 2014 the time limit for raising an assessment will only expire on 31 January 2015.
The usual time period during which tax may be deemed under a compliance check is 5 years and 10 months after the end of the tax year in question.The time limit can be prolonged up to 20 years in cases where there is negligent or fraudulent conduct by the taxpayer.
What needs to be done if you obtain an Information Notice from HMRC:
- Keep Calm
- Decide whether you need professional assistance before you reply to HMRC.
- Gather the information needed to provide a full answer to HMRC before replying to them.
- Only provide HMRC with the information they need to deal with the questions they have raised.
- If when reviewing your papers you do notice that tax has been underpaid consider whether a payment on account of tax due should immediately be sent to HMRC.
- If you are not able to meet a deadline set by HMRC for you to provide an answer then contact them in advance and agree with them a revised deadline.