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Corporation Tax Enquiry by HMRC

Company directors can receive an enquiry letter from HMRC at any time. HMRC will usually do this if they suspect that the tax return is wrong but they are also entitled to select taxpayers at random.

Why you have been picked.

The main factors which trigger an enquiry are:

  • Substantial changes in the companies declared profits.

  • Unusual entries in the companies accounts.

  • Information from third parties including competitors/disgruntled ex-employees and customers.

  • Surveillance of your business – more likely in cash businesses.

  • You are viewed for other reasons as a high risk company.

  • Your lifestyle is not compatible with your declared earnings.

Time limits

HMRC has broadly a year from when you file your corporation tax return to begin an enquiry. It can be extended if you file your return late. There are also provisions for it to be extended further if for instance there is an allegation of fraud. It is important the date by which an enquiry can be raised is checked at the outset.

Scope of the enquiry

The enquiry letter usually sets out the scope of the enquiry and may ask you to confirm various facts and also produce documents. The enquiry can relate to alleged suppression of income or excessive claims to deductions. It may ask you whether you wish to amend the tax return you have filed.

HMRC do not have to tell you what information they have about you and your business. It is best not to ask HMRC about this as they will not give this information and it makes you look defensive.

Meetings with HMRC

HMRC may invite you and your accountant to a meeting. You do not have to go to such a meeting. In general it is however a good idea provided you understand in advance what HMRC will raise as it shows you are cooperating. You should ask HMRC for an agenda in writing in advance.

You should ensure detailed notes are taken at the meeting to avoid any misunderstanding with HMRC later on as to what was said. You should ideally attend with someone who is experienced in such meetings. Prior to the meeting you should seek to narrow down the issues with HMRC in writing so that the meeting does not turn into a general enquiry into all the company’s tax affairs. You should be well prepared to deal with specific questions and have any relevant documentation with you to back up your position.

If there is anything you do not understand or cannot remember say so. Do not feel that you have to be helpful to HMRC and always give a reply. If you do not know something just say so.

Usually there will be at least two HMRC officers present. One will be the inspector dealing with your company and another will be an officer trained in these meetings. You need to be careful and stick to the issues as sometimes seemingly innocuous and “irrelevant” questions can prove very difficult for taxpayers later on. If you feel you are being pressurised you should say so and ask for this to be noted and if necessary end the interview. Remember you can leave at any time. You should also ask for a break and at any time speak to your lawyer/accountant in private.

Advisors

Usually this work is dealt with by accountants who will submit amended tax returns. However if the amounts are high or you consider HMRC’s approach is very aggressive you may decide to involve a solicitor. This may be sensible in any event if your accountant is concerned about the situation. You should check whether you have insurance to cover the legal costs.

A lawyer will be better placed to advice with your accountant if the matter is likely to end up in a Tax Tribunal.

Closure notice

Enquiries tend to take some time and this puts pressure on the company directors. It can also take a long time to get a reply from HMRC. The taxpayer can apply to a tax tribunal for a closure notice if it believes the enquiry is continuing unnecessarily. This is often difficult to show as HMRC may say they have been unable to obtain convincing explanations and so need to continue their enquiries.

What can go wrong?

It is important to get advice as soon as you are contacted by HMRC to establish whether the return is likely to be incorrect. You must be seen to be cooperating. This will affect any penalties which may be imposed. The enquiry could be extended into other aspects of your business such as PAYE and VAT. It could also be extended into your personal tax affairs.

Paying

If you agree to make a payment to HMRC then this will be drawn up by HMRC in a document. Make sure you can pay or agree time to pay or instalments. You may have to pay interest on the money left outstanding.

March 2018
David Anderson
Solicitor-Advocate and Chartered Tax Adviser