What to do if you have a HMRC Tax Investigation
So you’re going to be investigated? Right now, you’re probably feeling anxious, slightly nauseous and dreading what’s to come? Don’t worry, you’re not alone! Dealing with HMRC is one of life’s unpleasant necessities like going to the dentist; and finding out that you’re facing a tax investigation is like that same dentist telling you you’re going to need root canal! But help is at hand. Take a breath, relax and let us help you navigate the choppy waters ahead. Remember, tax investigations aren’t always bad news and a great many businesses are simply investigated randomly, rather than because there is an underlying problem or a noticeable discrepancy in the books. That said, tax investigations should always be taken seriously. Even if it might be random, assume they are looking at you for a reason. Approach the investigation calmly but seriously and assume you have made the mistake, not them.
With that in mind, the following points should help you through it all:
Stay Calm, Don’t Panic.
The worst thing you can do is get yourself in a state and start acting irrationally. Whatever you do, don’t contact HMRC straight away and say or do something without pausing and taking stock, or without taking advice first. Instead, clear yourself some time, get all your accounts together and have a read through them and remind yourself to be calm under pressure. This might sound trite but if you keep saying it enough it will sink in! And despite the threatening ‘feel’ or appearance of a letter from HMRC, you are not required to respond immediately. Bear in mind what HMRC themselves say as well:
“HMRC wants to give the right support to small businesses who are genuinely trying to get their tax right. We have improved the range of channels through which businesses can get guidance and made it easier to get in touch… We have a range of initiatives to help business customers… For example, we will discuss providing extra time to pay, if businesses are aware that they will be experiencing temporary financial difficulties in paying their tax in full.”
Get Professional Help.
Not a shrink but an accountant! If you haven’t already got an accountant, now is the time to do so. You might think you know your taxes better than anyone or that you can handle it all yourself but going up against HMRC without an accountant would be to hand them a massive advantage from the outset. Accountants are there to make sure you do everything you need to do, when you need to do it and in the exact way it needs to be done. They also know about the operating practices of HMRC and will have handled investigations before. If you needed complex work done on your car the chances are you would not do it yourself – the same thing applies to tax investigations. HMRC agree and recommend you hire a professional when you are under investigation.
Talk To HMRC and Seek Clarification.
Once you have an accountant it is time to get them to contact HMRC on your behalf and find out exactly what is going on. It is always important to keep in mind that you have the right to ask HMRC about anything at any time, whether you are confused or simply need further clarification. HMRC themselves point out in their guidance that all sides should ‘work together on a cooperative, non-adversarial basis in order to resolve a dispute.’
Work Out What Level Inquiry You Are Facing.
When your accountant talks to HMRC he or she will be able to find out exactly what type of investigation you are facing. These can be divided into three different types – aspect, full and random investigations. Random enquiries are simply a HMRC tool to evaluate people’s tax returns in areas that they see as higher risk (particularly in SME’s); full enquiries are enquiries that look across the whole of your tax returns; and aspect enquiries are where they want to reassess one or more specific areas of your tax information. The worst case scenario is a COP9 (code 9) investigation, which is issued when HMRC thinks that there is deliberate fraud going on. These of course are the most serious investigations of all.
Never Assume Anything.
Once you know what type of investigation you are facing, don’t assume they have made a mistake. Go through everything with your accountant and then go through it again. And if they have found an error, don’t assume it’s only for that year. Check all your previous returns, because you can be sure they will do exactly the same thing.
Always Try To Be One Step Ahead.
Read closely through all the forms they send you and draft your responses very carefully. If you know they are going to ask you further questions about a particular area, then provide more detail than usual on that area and furnish them with supporting documents as well. Pre-empting their questions and providing evidence is helpful, shows a willingness to cooperate and should hopefully reduce any potential penalties.
Make Sure You Prepare Well For Every Meeting.
Request an agenda before the meeting and go through every section, preparing thoroughly and collecting all the documentary evidence you think they will want to see. When it comes to the meeting itself be on time, be courteous, be patient and don’t be afraid to ask about anything you don’t understand. Afterwards, go through their meeting notes in case there have been any misunderstandings and let them know if anything needs amending in those notes (they may be used later in court.)
Be Honest At All Times.
If you find something wrong, tell them up front. No matter what is wrong, full disclosure will be the best policy in the long run. Failure to do this will inevitably lead to increased penalties and could possibly lead to a criminal investigation.
Don’t Over-Promise and Under Deliver.
When it comes to paying back money or meeting deadlines, make sure you don’t make any promises you can’t keep. If you can’t make a deadline tell HMRC and ask for a revised schedule. Missing agreed deadlines can lead to increased fines and more formal demands for more information. The same applies to missing pre-agreed payment schedules – if you know you are going to miss a payment, let them know!
If All Else Fails, Get Mediation.
Should there be little or no progress then mediation and ‘alternative dispute resolution’ (ADR) might well be the answer. ADR mediation is often used to resolve cases when positions are entrenched or solutions are unlikely. It’s important to note that mediation isn’t capitulation – it’s a way of finding compromises on both sides without having to go to expensive tribunal hearings.
Lastly, once again – don’t panic!!