We need to talk about HMRC Investigations, it is a Game Changer!

The sheer complexity of the UK tax laws (length of a tax statute, the specific language used, the drafting style, and the diversity of taxes), makes it easy for individuals and businesses to unknowingly cross the line into the grey area of penalties, civil investigations, criminal charges, and reputational damage. Parliament endows HMRC with powers to collect, pay and manage taxes but more importantly, it must apply the law correctly and treat all individuals and businesses fairly.?

Taxation in the UK is based on four main principles - fairness, certainty, convenience, and efficiency:

1.??????Fairness is about the taxpayer’s ability to pay taxes according to their family and personal needs

2.??????Certainty relates to the information provided to the taxpayer about why and how the taxes are collected

3.??????Convenience refers to the simplicity of the tax collection and submission process (ease of compliance)

4.??????Efficiency is about the tax collection itself where the collection should not use up more than the necessary resources or cost more than the tax levied.

To fulfill their duties and obligations, HMRC is always on the lookout for those who deliberately evade taxes or dishonestly under-report their gains or offshore wealth to undermine the economy, provide unfair competition to honest taxpayers and cheat the public revenue. If you are an individual or a business under HMRC’s scrutiny for:?

• underreporting your overseas (non-UK jurisdictions) funds
• not declaring overseas taxable income, gains, or assets
• deliberately hiding information about a beneficial asset, income, or gains ownership
• assisting an individual or a business with or promoting illegal tax avoidance schemes

It might just be the start of a long and arduous journey unless you enlist the help of an experienced?expert ?who understands the aspects of different UK Tax rules. Since every situation is different, it would be wrong to assume the taxpayer’s guilt in every case or that HMRC is always correct in its assumptions.

How the HMRC calculates the tax gap and launches an Investigation

HMRC embarks on inquiries by evaluating past submissions without informing the taxpayer. Apart from gathering data based on human intelligence, they use a highly sophisticated software called ‘Connect ,’ analysing vast volumes of taxpayer data to calculate and measure the tax gap – the difference between the amount to be paid to the Government and the amount of tax collected by ??HMRC. In a July 2020 report, ??HMRC stated that the tax gap in 201-20 was ￡35bn or 5.3% of total tax liabilities .

?If there are any red flags, HMRC zeroes in on the suspected tax offender and issues a formal investigation letter. You must act promptly on receiving a letter from HMRC and immediately enlist the help of an expert to manage your tax affairs from the start of the investigation. The HMRC has wide-ranging powers to recover every penny from the proceeds of tax frauds, including account freezing orders, assets recovery powers (trace, confiscate, and sell assets). The department works with the Tax Crime Alliance and Global Tax Enforcement Alliance to globally track down criminals who have fled justice by absconding overseas.

HMRC has the legal right to check everyone’s tax affairs

Though all investigations conducted by the HMRC are serious, the rank of severity is indicated in the letter sent by HMRC.

1. A full investigation starts with a formal letter to review the entirety of your business records, usually because HMRC believes or has reason to believe that there is a significant risk of tax evasion. In the case of limited companies, HMRC will investigate the tax records of company directors as well as the overall business. You may receive a letter from HMRC’s Fraud Investigation Service (FIS team), with a Code of Practice (COP) 8 or 9 letter stating the type of taxes under investigation such as Directors Loan Account, Large Debts Written Off, Large Creditors interest, Employee Wages and Sale of fixed assets.
2. Aspect investigation begins with HMRC examining facets such as irregularities in your tax returns, VAT repayments or reliefs, hiding income, smuggling taxable goods, or supply chains evasion. These must be addressed through transparent and open correspondence between HMRC and the taxpayer or an expert.

Whether formal or informal, whether it relates to a specific aspect of tax or is a full-fledged fraud investigation, if you receive a letter from the HMRC, it is in your best interest to consult an experienced tax consultant who can help you avoid or mitigate heavy penalties or even prosecution involving substantial amounts of money, and subtle distinctions with significant implications for the case. Losing can mean bankruptcy or insolvency for the taxpayer.

For example, I was recently working on a case involving zero-rating VAT on exports of high-value goods worth millions of pounds that did not satisfy the VAT statute conditions or certain conditions to prove entitlement to zero-rating. Without the right knowledge, skills, expertise, or an understanding of the UK Tax system with its multiple rules, taxpayers might fight a losing battle. An expert will guide, educate, and assist taxpayers in paying the correct amount assessed by HMRC, to save legal costs, penalties, and interest, just like I did. Applying commonsense principals is better understood by taxpayers than mounting ambitious legal challanges for financial gain.

The investigation, timeline, and scope

A letter sent by HMRC contains a request for documents, information, or a set of questions to be answered by the taxpayer. The scope of the investigation ranges from a single year to a period of six years if it’s a case of poor accounting and up to 20 years if there is a deliberate attempt at tax evasion .

If the initial investigation does not result in a quick resolution, HMRC follows it up by visiting the taxpayer’s principal place of business or summoning the taxpayer to a meeting at HMRC’s offices, which must be attended with an expert. While most investigations last a month or months, they may be extended due to the nature of the investigation and the complexity of issues. This leads to unnecessary stress, financial burdens, and disruptions for the taxpayer/business. Hence it is advisable to seek proper guidance right from the start. Once the investigation is complete, the taxpayer has three options; they can:

1. Receive a decision notice along with a civil law assessment of the tax amount to be paid, sanctions, or a confirmation of no sanctions.
2. Settle with HMRC
3. Receive an offer of Contractual Disclosure Facility from HMRC Fraud Investigation team where there is a serious suspicion of deliberate tax evasion (Read the full article on CDF ) or notice of prosecution.

Guidance for businesses

While businesses may feel concerned about the prospect of a tax investigation and try to hide evidence of irregularities, if any, or delay the proceedings, it can lead to tougher sanctions from the department and prosecution and/or penalties (civil or criminal) as a tax fraud attempt.

Whether the HMRC wants to look at business records concerning VAT, Corporate tax, Capital Gains, and Construction industry Scheme (CIS) or widen the scope of their investigation, you must cooperate and assist HMRC to the best of your abilities. The new zero-tolerance approach aims to protect HMRC employees against violence and aggression from customers, their accountants, or inexperienced professionals. You must proceed carefully with sound guidance only from experienced tax experts who will apply their skills, experience, and knowledge of HMRC’s commitment as a public body to help you reasonably and proportionately navigate the nuances of the investigation.

The Game Changer

Whether you are a business owner or an individual taxpayer, you must promptly engage an experienced expert to assist during all investigations by HMRC. You must seek help to either prevent or mitigate the investigation. The right tax consultant can:

• Assess the tax risk and assist with disclosures (voluntary and involuntary)
• Deal with HMRC correspondence and respond to their inquiries
• Represent you at HMRC meetings
• Negotiate the penalties
• Prepare you for civil or criminal litigation

If you face an HMRC tax investigation and require expert tax guidance, drop me an email at [email protected] . I can also guide individuals or businesses on regulatory and compliance issues to pre-empt investigations.

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