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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 must usually do so within 12 months from the date the tax return was filed, but this can be extended if you filed the return late.
How long can an HMRC tax enquiry stay open?
When HMRC opens an enquiry into a certain period, it remains open until HMRC is satisfied it has fully considered the risks identified 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 doesn’t resolve the issues. In these circumstances, there are alternatives, such as applying for mediation through HMRC’s alternative dispute resolution (ADR) process or appealing to the tax tribunal.
Once HMRC is satisfied that all the risks have been addressed, it will issue a formal closure notice concluding the enquiry. Once a closure notice is sent, HMRC cannot revisit the same tax dispute, as long as it has been given all relevant information.
How HMRC identifies risks
HMRC has access to a vast amount of information from multiple sources to help identify risks:
- Public registers, such as Companies House and HM Land Registry
- Sector-specific data to benchmark business’ financial performance
- Findings from its own investigations
- Data provided from foreign jurisdictions and financial intermediaries
HMRC has 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 (personally or for business) is a common trigger for HMRC to open an enquiry and check whether the arrangements comply 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.
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 specific groups:
- 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 that market such schemes to individuals and businesses.
This has led to a large amount of correspondence being issued to taxpayers:
- Tax enquiries, assessments and information requests
- General anti-abuse rule (GAAR) notices
- Accelerated payment notices (APNs)
- Follower notices (FNs)
- Partner payment notices (PPNs)
How S&W can help with your tax enquiry
HMRC enquiries can be distressing. It may be unclear how long an enquiry will take and the extent of checks. Navigating the paperwork can be confusing and time-consuming, and any tax litigation can involve numerous tax appeals and take years to conclude.
Our tax experts can help:
- Reviewing existing arrangements
- Helping you understand and navigate HMRC’s enquiry process
- Working with you to establish the facts and gather relevant evidence to support your position
- Advising on your options and the most appropriate way to resolve your case quickly
- Settling 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 knowingly failing to pay or wilfully underpaying UK tax. It is illegal and can lead to criminal prosecution.
Tax avoidance is bending the law or putting 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 and where HMRC discovers an issue that wasn’t fully disclosed, it can look back further and raise an assessment for additional tax later than 12 months:
- At least four years from the end of the relevant tax period
- Six years from the end of the relevant tax period when the error arose 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 a reasonable excuse, which restricts the window to four years.
Is additional tax always payable when an HMRC tax enquiry is closed?
When HMRC identifies and queries potential tax risks, it does not always mean that additional tax is payable. 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 to probe the risks and 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 an 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 an underpayment of tax in earlier years, it has wide-ranging powers to look into these 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. These will depend on the behaviour that has led to the underpayment of tax and the level of cooperation with HMRC during its enquiries.