A letter from HM Revenue & Customs (HMRC) telling you that it is checking your tax affairs can be unsettling. However, an HMRC compliance check does not, by itself, mean that HMRC believes you have acted dishonestly or committed tax fraud.
A compliance check is HMRC’s process for checking a person’s tax position. HMRC may use a check to establish whether the right amount of tax has been paid, whether allowances or reliefs have been claimed correctly, or whether information in a return or other document needs to be corrected. Checks can range from a relatively focused request about one issue to a detailed examination of a person’s tax affairs.
That said, a compliance check should not simply be ignored. The information requested, the scope of the check and the way in which HMRC’s questions are answered can all matter to the eventual outcome.
What is an HMRC compliance check?
An HMRC compliance check is an examination of a person’s tax position to establish whether the correct amount of tax has been paid at the correct time and whether the appropriate allowances and reliefs have been claimed. HMRC may also use compliance checks to address suspected non-compliance and to help ensure the tax system operates fairly.
HMRC usually contact you by letter, notifying you that they are conducting a compliance check. They may ask for information and/or documents. Depending on the circumstances, HMRC may also ask for a meeting or inspection.
Why has HMRC opened a compliance check into my tax affairs?
HMRC can open a compliance check for a number of reasons. In many cases, HMRC has identified a particular risk or discrepancy that it wants to examine. As an example, figures in a return may appear incorrect, sometimes large VAT repayment claims, or a declared tax liability appears inconsistent with the underlying turnover.
HMRC also carries out some checks as part of its random enquiry programme. Random checks are intended to help HMRC assess the nature and extent of non-compliance as well as to maintain a visible compliance presence across the taxpaying population.
A compliance check therefore does not necessarily mean that HMRC has already concluded that something is wrong. It means that HMRC wants to establish the correct tax position.
What is the difference between an aspect enquiry and a full enquiry?
HMRC may use the terms ‘aspect enquiry’ and ‘full enquiry’ to describe the scope of an enquiry. An aspect enquiry generally focuses on one or more particular matters, while a full enquiry examines the return more broadly.
However, it is important not to treat these as completely separate statutory procedures. HMRC’s own guidance explains that the legislation does not distinguish between aspect and full enquiries; the terms are used in practice to describe the nature and extent of the enquiry.
The letter from HMRC should indicate what it wants to check and why. The scope of the questions and information requests can provide an important indication of what HMRC is currently examining.
What happens during an HMRC compliance check?
Although the process varies from case to case, HMRC will normally explain what it wants to check and request information or documents relevant to the tax position. It may then ask follow-up questions, discuss the information provided and carry out further enquiries before reaching a conclusion.
Some checks are relatively straightforward and may be resolved quickly. Others can take considerably longer, particularly where the tax affairs are complex, several tax periods or taxes are involved, or HMRC needs further information to establish the facts.
At the end of the check, HMRC will communicate the outcome. If no additional tax has been identified, HMRC should tell the taxpayer that the check is complete. If HMRC concludes that additional tax is due, it may amend the return or issue an assessment, depending on the circumstances.
Does HMRC have the right to ask for all my financial records?
Not every request from HMRC is unlimited. HMRC has formal information-gathering powers, but its own guidance states that information and inspection powers must be used reasonably and proportionately and for the purpose of checking a person’s tax position.
At the same time, a person who receives a valid information or inspection notice may have a legal obligation to comply. HMRC can impose penalties in certain circumstances where information is not provided or a required inspection is refused or obstructed.
The question is therefore not simply whether HMRC has asked for something, but what the request is for, what powers HMRC is relying on and whether the information requested is relevant to the check. Where the scope of a request is unclear or appears particularly wide, it may be sensible to obtain professional advice before responding.
What happens if I ignore an HMRC compliance check?
Ignoring HMRC correspondence is unlikely to make the compliance check disappear. HMRC can use formal information and inspection powers where appropriate, and penalties may arise where a person fails to comply with a valid information or inspection notice.
HMRC also expects taxpayers to continue filing tax returns and paying taxes that become due while a compliance check is ongoing.
If you are struggling to respond within the time given, the better approach is generally to address the issue with the officer dealing with the check rather than simply allowing the deadline to pass.
What happens if HMRC finds an error?
If HMRC concludes that additional tax is due, you will normally be told how much is payable and how HMRC has calculated the adjustment. Interest may also be charged where tax should have been paid earlier. A penalty may be considered depending on the circumstances.
Penalties for inaccurate returns and documents can depend on the behaviour that led to the inaccuracy. HMRC distinguishes, among other categories, between a failure to take reasonable care, deliberate behaviour and deliberate behaviour that is concealed.
This distinction can be important. HMRC’s assessment of the underlying behaviour can affect both whether a penalty is charged and the amount of the penalty.
What does ‘reasonable care’ mean for HMRC penalties?
HMRC expects taxpayers to take reasonable care when preparing tax returns and other documents. If a person took reasonable care but a return was nevertheless inaccurate, HMRC says that a penalty for the inaccuracy will not normally be charged.
Whether reasonable care was taken depends on the circumstances. HMRC says it will take the individual’s circumstances into account when considering reasonable care.
This means that an error does not automatically amount to careless behaviour. The circumstances in which the error occurred, the information available at the time and the steps taken to prepare the return can all be relevant.
I think I have made an error in my tax return. What should I do?
Discovering an error yourself is different from HMRC identifying an inaccuracy during a compliance check. HMRC’s penalty framework takes account of whether the taxpayer tells HMRC about an issue and how they cooperate with the compliance process.
However, the position becomes considerably more sensitive if there is a possibility that the issue involved deliberate behaviour rather than an innocent or careless error. HMRC defines deliberate behaviour as conduct where a person knew information was incorrect or knew that relevant information should have been disclosed to HMRC but did not do so.
Where HMRC suspects tax fraud, it may consider a criminal investigation or, in selected cases, its Code of Practice 9 (COP9) civil investigation of fraud procedure. Under COP9, HMRC may offer a Contractual Disclosure Facility (CDF), under which a person can make a complete, accurate, open and honest disclosure of deliberate behaviour. If the terms are met, HMRC undertakes not to commence a criminal investigation into the disclosed frauds.
Because the consequences of describing conduct as careless, deliberate or fraudulent can be significant, this is an area where professional advice may be particularly important before making a substantive disclosure to HMRC.
Is an HMRC compliance check the same as a tax fraud investigation?
No. A compliance check is HMRC’s general process for checking a person’s tax position and does not, by itself, mean that HMRC has concluded that the taxpayer has committed fraud.
If HMRC develops a suspicion of deliberate fraud, the matter may move into a different process. Depending on the circumstances, HMRC may conduct a civil investigation under COP9 or commence a criminal investigation. COP9 is specifically used in selected cases where HMRC suspects fraud and offers a contractual route for full disclosure in return for an undertaking not to pursue a criminal investigation into the disclosed frauds, subject to the terms of the facility.
The distinction is therefore important, but a routine compliance check should not be assumed to be a fraud investigation simply because HMRC has asked detailed questions.
How long can an HMRC compliance check last?
There is no single standard duration for every compliance check. A focused check may be resolved relatively quickly, while a complex enquiry can take substantially longer.
The duration can depend on the number of issues being examined, the complexity of the tax affairs, the availability of records, whether further questions arise and whether several tax periods or taxes are involved.
HMRC’s information powers are also subject to statutory safeguards and time limits. In some circumstances, tax assessment time limits can be extended, including where careless or deliberate behaviour is involved.
What should I do if HMRC has contacted me about a compliance check?
The first step is to understand exactly what HMRC is checking and what information it has requested. The letter should identify the officer dealing with the case and explain the subject of the check.
It is important not to assume that the check is either trivial or evidence of wrongdoing. The correct approach depends on the scope of HMRC’s questions and the underlying tax position.
Obtaining professional advice before responding is of utmost importance. It is paramount that you fully understand your position, potential exposure (if any), and what options you have available.
How can Thompson Roderick help with an HMRC compliance check?
An HMRC compliance check can become complicated where the issues extend beyond a simple factual query or where there is a significant potential tax liability or penalty.
Thompson Roderick’s Tax team can help you understand the scope of an HMRC compliance check, assess the issues raised by HMRC and assist with the response and subsequent stages of the process.
Where an HMRC check raises concerns about deliberate behaviour, fraud or the possibility of a COP9 investigation, specialist advice can also be provided on the appropriate route forward.
If you have received a compliance check letter and would like to understand what HMRC is asking and what the next stage may involve, contact Thompson Roderick’s Tax team.
Important information
This article is intended for general information only and does not constitute legal or tax advice. The application of HMRC’s powers, the assessment of penalties and the appropriate response to a compliance check will depend on the circumstances of the individual case. If HMRC has contacted you about your tax affairs, you should obtain professional advice if you are unsure about your position.
