HMRC tax investigations into whether a person or business have met their tax obligations vary greatly depending on the details of the individual case, from relatively informal checks to a more in-depth investigation into your tax situation.
It may be that an HMRC tax investigation is opened to confirm that the information supplied in a filed tax return is accurate and complete. In more serious tax investigations, where HMRC suspect that tax fraud has occurred, the investigation will be handled by the HMRC’s Fraud Investigation Service. In this situation, information on the tax payer for up to the past twenty years may be gathered as evidence.
How will you know you are the subject of an HMRC tax investigation?
Your first contact will be a letter from the Fraud Investigation Service, under one of the following:
- HMRC Code of Practice 8 (“COP8”) – used where tax avoidance resulting in loss of tax is suspected by the HMRC, but not fraud.
- HMRC Code of Practice 9 (“COP9”) – used where the HMRC suspect tax fraud.
Both of the above are serious investigations and it is not unusual for an investigation initially raised under COP8, to be altered to COP9 once evidence has been inspected.
The aim of a COP9 HMRC tax investigation is to ensure that all outstanding tax, any interest incurred, and resulting penalties are paid, but there is also the possibility of criminal prosecution should you be unco-operative with the HMRC or supply false information. It is important, therefore, that any HMRC tax investigation be seen as a serious matter.
What’s the likelihood that you will face an HMRC tax investigation?
There are various factors that could flag up a tax payer for a level of investigation by the HMRC, the most common ones including:
- Tax returns are filed late or include mistakes that require later correction
- Late payment of tax
- Major variances, or inconsistencies, between tax returns that are not explained, such as a sudden cut in income or where expenses greatly increase
- There is an inconsistency between your tax returns and your standard of living or the success of your business
- Your tax returns include a level of costs that is unusually high for the industry your business operates in
- You receive property income
- Your business operates in a high risk industry, for instance, where you receive cash payments
- Your business operates in an industry that HMRC has decided to concentrate on
- You have one or more offshore bank accounts
Finally, you may become the subject of an HMRC tax investigation if they receive a tip-off that you are not complying with your tax obligations.
What information can HMRC gather on you during a tax investigation?
The Connect database is used by the HMRC to search all records that may reveal information on any individual or business under investigation, including non-HMRC records such as those kept by the Land Registry and financial institutions.
The HMRC may also gather information via the Common Reporting Standard and other international reporting practices, meaning that it is increasingly difficult to hide money.
Using all of these methods, the HMRC can gather the following:
- Bank account details and information, both in the UK and from over 60 overseas countries
- Land Registry information on property purchases and related stamp duty payments
- DVLA details of vehicles bought and individual ownership
- Earnings from employment, whether permanent, casual or ad hoc
- Information from HMRC tax systems including how much tax you have paid, past tax returns, VAT registration, and whether you have been investigated previously
- Information on your online trading from websites such as Amazon, eBay, Gumtree, Etsy etc
- UK border information demonstrating your travel from and to UK airports
- Social media accounts, including Facebook, Instagram, Twitter and LinkedIn
The Fraud Investigation Service also has the power to force any third party to provide information relevant to an HMRC tax investigation.
What should you do if you are the subject of an HMRC tax investigation?
Should you be investigated by the HMRC for tax evasion, this will naturally be a worrying time, especially if you are unsure as to why the investigation is taking place.
It may be that there has been a mistake made either by you or by the HMRC but whatever the situation, there are steps you can take to ensure that the whole process is as easy and pain-free as possible.
The worst thing you can do in the face of an HMRC tax investigation is to give in to your worries and frustration. Maintain your focus so that you can deal with the investigation in a level-headed manner.
Take professional advice immediately
A tax adviser has the experience and knowledge to help you through an HMRC tax investigation. Yes, you will be required to pay for their services but in the long run, their expertise can save you money. Even if you believe that you are innocent of any wrongdoing, having a tax adviser on hand to deal with the HMRC will not only act as a buffer for you personally but also allow you to carry on with your life, and your business, as usual.
Gather all the information you need
One of the main benefits of using a tax adviser is that they know exactly how HMRC carry out a tax investigation, including the information they are likely to request.
A tax adviser can assess your situation and your financial records with an eye for what HMRC will want to examine.
Always be honest with the HMRC and do not try to hide anything from them. If it is discovered that you have lied during a tax investigation or purposefully withheld information, your dishonesty may well result in much higher penalty fees. There is also the possibility of criminal prosecution and in the most severe cases, imprisonment.
Talk about the investigation to your tax adviser only
It may be tempting to complain about the investigation to friends and family, especially on social media, but this can have a negative knock-on effect should your customers, suppliers, competitors, or business peers hear about it.
Keep your conversation for your tax adviser’s ears only.
Do not be tempted to destroy records
Destroying records and other materials is just as harmful to your case as having records which are found to be fraudulent.
The HMRC investigator may find a lack of documentation suspicious.
Face up to the fact that HMRC will find out the truth
There is very little chance of hiding anything from HMRC so don’t try to make excuses, delay submitting information, or take any other course of action in an attempt to deceive. If you are found out, there is a possibility that the investigation will become a criminal one.
Co-operating with the tax investigation, whether you are innocent or guilty, will ensure the process is a much smoother one that will take less time to resolve.
Consider whether to make payments now
An HMRC tax investigation may take a long time to resolve. To avoid incurred interest on any outstanding amounts and to go some way towards a less severe outcome, you may wish to make payments now.
Making payments during the investigation will demonstrate your cooperation with HMRC and may lead to a quicker resolution.
Where you feel that little progress is being made on either side, the investigation has been lengthy with no end in sight, and the threat of a tax tribunal is looming, mediation or alternative dispute resolution may be the answer.
Even when you finally pay more than you are happy with, mediation will likely bring a speedier end to the investigation.
Learn from the investigation
Once the tax investigation is resolved and any payments have been made, learn from the process by making sure that in future you are fully compliant with your tax obligations. It might be helpful to arrange for your tax adviser to carry out periodic checks on your tax compliance too.
HMRC tax investigation FAQs
What triggers an HMRC investigation?
Tax investigations can be triggered for a number of reasons, such as activity deemed to be unusual for the size or sector of the business (such as high expenses or low corporation tax liability), or from tip-offs.
How do I know if HMRC are investigating me?
You will be notified directly by HMRC if you or or your business are subject of an investigation. The letter should also indicate the scope of the investigation, for example if it is in relation to a tax return or a full tax audit.
How long does HMRC have to investigate?
HMRC will investigate retrospectively. How long HMRC will go back into your tax affairs will depend on the specific circumstances. If tax evasion is suspected, HMRC could investigate the previous two decades, while tax return errors would generally be up to six years.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or tax advice, nor is it a complete or authoritative statement of the law and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert legal advice should be sought.