Dive into the world of PAYE investigations. Uncover the facts, implications, and insights in this informative blog
Discovering that you are being investigated by HMRC can be very stressful, even if you are certain that you have not done anything wrong.
It is important to take HMRC seriously because the consequences can be serious, and may even lead to criminal charges.
Unfortunately, there is no escaping HMRC’s scrutiny once their investigation has commenced. It is therefore advisable to respond as quickly as reasonable and practical in order to conclude the matter as swiftly as possible.
An HMRC investigation is not something that you should ever take lightly; professional advice from a solicitor or an accountant is normally imperative. Below is an overview of what you can expect.
How Are HMRC Investigations Triggered?
If you have been making regular returns you might be wondering why your business is being investigated by HMRC.
It may be that HMRC believes there is a discrepancy in your figures, or because one element appears to be out of proportion with the rest. However, there are a number of other possible flags that HMRC look out for when considering whether to launch an investigation. These include:
- The industry - high risk industries which commonly involve cash transactions are often targeted
- Your returns are late
- The returns appear to be inconsistent with your standard of living/assets
- Your costs are higher than would be expected for the industry
- There has been a large drop in your income
- Your costs have substantially increased
- There are inconsistencies between different returns
HMRC may also be acting on a tip-off or information exchanged with other nation countries under a tax treaty. A tip-off could also be from anti-money laundering legislation where certain professionals and banks are obliged to report suspicious activity to the government.
If none of the above apply, it may be simply that you have been chosen at random for HMRC to check.
What Types Of Investigation Can Be Carried Out?
HMRC are well known for investigating income tax, but their remit stretches much wider. Their investigations may cover any of the following:
- Corporation tax
- Climate change levy
- Construction industry scheme
- Landfill tax
- Capital gains tax
- Insurance premium tax
- Non-resident landlord scheme
- VCT, SEIS and EIS
Not all types of HMRC investigations are the same. They have three broad types of investigation: full, aspect and random.
A full enquiry is undertaken when HMRC believes there is a significant chance of errors and decide to look at all the records you hold. This not only includes all the business accounts but can also include the personal records for the directors.
In contrast, an aspect enquiry is where HMRC have a specific concern about one element of your business. This usually means that they believe there may be an error rather than a suspicion of widespread fraud or tax evasion.
The type of investigation is, as the name suggests, just a random check. Any business can be chosen for this even if there are no underlying HMRC concerns.
Should You Hide Irregularities?
Even if you have been chosen at random, an HMRC investigation can cause real worry. If you know there are a few irregularities in your accounts, you may be even more concerned.
Your instinct may be to try and delay the investigation in the hope that HMRC will turn their attention elsewhere, but this will not happen. Once HMRC has started an investigation, they will pursue it until the matter is concluded, one way or another.
You may also try to hide errors or deliberate omissions in an attempt to prevent HMRC from identifying wrongdoing. This is a very big mistake and is likely to lead to a harsher penalty. If HMRC believes that you are deliberately trying to cover something up and it is sufficiently serious, they may be inclined to treat it as fraud which can lead to penalties under criminal law (i.e., a criminal record), rather than just being a civil offence with financial penalties and interest payable.
You may find that if HMRC request information about one element of your business, they widen their investigation at a later date. Getting advice from your solicitor or accountant is essential because there are big questions about how much you should co-operate and when it is advisable to push back.
Generally, it is advisable to be seen to co-operate, but in certain circumstances, you may have strong grounds to be able to protect your data.
What Happens When HMRC Launch an Investigation?
You will receive formal notification that an investigation has commenced with information about the statutory right of HMRC to request such information and notices about your rights, but strictly speaking, this is not the first stage. HMRC use software to identify red flags and inconsistencies and may carry out some brief background checks to determine if a full investigation is warranted.
If there is a suspicion of fraud, the notification letter you receive will be from the Fraud Investigation Service at HMRC. This letter will help you to determine the basis of their investigations.
No matter what type of letter you receive, it is important to get advice from your solicitor and accountant right away.
What Happens Next?
Most HMRC investigations will begin with a specific request for information from you. This may also include a request to see certain documentation, or even for you to answer questions directly. If this does not provide the clarity required, or concerns remain, HMRC may visit your business premises.
It is normal for an investigation to initially focus on a single year, but if HMRC believes there are wider problems they can extend the investigation to cover the last six years. If there is an allegation of tax evasion, this period can be increased to the previous 20 years.
You can expect for a tax investigation to last for several months, potentially putting serious stress on your business in the meantime. The information requested and/or visits can be disruptive, and it can be difficult to focus on business as usual while the investigation is ongoing.
How Will An Investigation End?
There are three possible outcomes to an HMRC investigation. These are:
- You reach a settlement agreement with HMRC
- You receive a letter from HMRC with a decision - this could either be confirmation of no action being taken or the issuing of a civil law penalty
- A decision being issued by the Fraud Team. This will either be to confirm no action or to advise you are being formally charged.
In some cases, if you are being charged by the Fraud Team you may be offered a Contractual Disclosure. This means in return for you providing full and honest disclosure, and repaying outstanding tax, interest and penalties HMRC agree not to prosecute you.
There is no escaping the fact that an HMRC investigation is difficult and something most businesses would strongly prefer to avoid. If you believe you are being investigated or are notified that an investigation has commenced, you should seek professional advice immediately.