HMRC Compliance Checks | How HMRC Gathers Information
As part of its drive to reduce the ‘tax gap,’ being the difference between the amount of tax HMRC collects and the amount it estimates is actually owed, HMRC operates a powerful data networking and analytical system known as HMRC Connect. The system enables HMRC to identify businesses or individuals that may not have paid the correct amount of tax.
Originally launched in 2010, and significantly enhanced over time, the Connect system enables HMRC to identify potential underpayments of tax by analysing the difference between information it already holds, against a taxpayer's reported financial affairs.
HMRC is able to identify potential disparities, such as undeclared rental income, discrepancies between reported earnings and financial activity, and failures to submit required tax returns.
The advancements in HMRC’s technical capabilities are already resulting in a substantial increase in the number of individuals and businesses finding themselves subject to scrutiny.
Nazaqat Maqsoom of KANGS outlines how information notices, nudge letters and compliance checks are used to identify potential tax issues, and what to do if you are contacted by HMRC.
How HMRC Collects Information
HMRC employs a number of approaches to obtain the information it requires to recover outstanding tax, including the following.
HMRC Nudge letters
In previous articles, we have referred to the nature and operation of HMRC nudge letters which are issued to encourage individual’s or corporate taxpayers to review their tax returns and ensure that all financial gains have been fully declared.
Even where the taxpayer knows that the nudge letter is incorrect, it should never be ignored as HMRC is unlikely to disregard any failure to respond. Further action may follow, potentially resulting in costly consequences if the matter proceeds to an enquiry or full investigation.
Nudge letters are a means whereby HMRC seeks to encourage ‘without prejudice’ discussions in an attempt to settle enquiries efficiently and economically.
HMRC Information Notices
An Information Notice can be issued by an officer of HMRC, requiring the recipient to provide specified information or documents for the purpose of checking a person’s tax position.
These notices take several forms:
- A Taxpayer Notice requires the taxpayer to provide information or produce documents reasonably required for the purpose of checking their tax position.
- A Third Party Notice requires the third party to provide information or produce documents reasonably required for the purpose of checking another person’s tax position.
- A Financial Institution Notice requires the provision of information or to produce documents reasonably required for the purpose of checking another person’s tax position.
- An Identity Unknown Notice, only issued by an authorised officer, requires a third party to provide information or produce documents reasonably required for the purpose of checking the tax position of:
- a person whose identity the officer does not know or
- a class of persons whose individual identities are not known.
- An Identification Notice, only issued by an authorised officer, requires a third party to provide ‘relevant information’ about a person or class of persons whose identity is not known by HMRC, but where it holds information from which their identity can be ascertained. ‘Relevant information’ is the name, address and date of birth (if known), of the person whose identity is sought.
The information requested by an Information Notice may include details of:
- company accounts and accounting records,
- previous tax returns and supporting documentation,
- evidence of income and expenditure, such as invoices and receipts,
- information relating to a client's affairs,
- information concerning third parties.
Whilst HMRC's investigatory powers are extensive, they are not unlimited and statutory restrictions are contained within various Acts including the:
- Taxes Management Act 1970
- Income Tax Acts
- Value Added Tax Act 1994
- Corporation Tax Acts.
Compliance Checks Explained
A compliance check is a routine review aimed at confirming that tax returns are correct and they are often triggered by late filings, significant changes in figures, discrepancies and random selection.
HMRC will issue a Compliance Check Letter setting out the nature of the tax being reviewed, the information it requires, and the time limit allowed for compliance.
The information requested may include invoices, bank statements or receipts which, upon receipt, a Compliance Officer will compare with the filed documents already held and, if there appears to be a discrepancy, an explanation will be requested.
If HMRC discovers underpaid tax, it will explain how the shortfall can be paid. If the decision reached by HMRC is disputed, an appeal may be lodged within thirty days.
HMRC Targeted Visits and Dawn Raids
HMRC is empowered to conduct unannounced visits where it anticipates irregularities of any nature. Indeed, the Treasury has recently stated that it has employed an additional three hundred and fifty investigators, in addition to its existing compliance teams, as part of its current campaign, which commenced with London’s souvenir and tourist trade, long suspected of widespread cash handling irregularities.
However, all high street businesses, such as convenience stores, vape shops, barbers and nail bars, are at risk.
Frequently known as ‘Dawn Raids,’ such visits actually occur at any time in order to deprive the target of a visit the opportunity to prepare.
How Can We Help You?
If you receive correspondence from HMRC relating to any form of investigation, it is essential that it is not ignored as failure to respond is likely to result in penalties being imposed and your position adversely affected.
An invitation to attend any form of voluntary interview, however innocent it may seem, should be refused until expert legal advice and guidance has been sought.
The team at KANGS provides clients with extensive experience gained from handling disputes of every nature with HMRC and our team is always immediately available to assist any individual or business subjected to a ‘Dawn Raid.’
Although it may seem natural to initially consult an accountant for advice, seeking advice from an experienced solicitor provides an important additional level of extra security given the existence of legal professional privilege, which protects communications between a solicitor and client. Such privilege does not extend to communications between an accountant and client.
Should you require assistance with a tax investigation or dispute with HMRC, please do not hesitate to get in touch using the contact information provided below.
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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