HMRC Compliance Checks

Gary Green
Gary Green
August 20, 2023

If you self-report your tax return, it is very important to ensure that you are being completely truthful about the amount you owe. However, in some cases, mistakes can be made and these could cause you to underpay your tax. In other cases, individuals will deliberately misreport the amount that they owe in order to save themselves money. 

An HMRC compliance check can be carried out to ensure that businesses and individuals are reporting their taxes correctly, and usually, those targets are selected because of a concern about accounts or tax returns that have been sent to HMRC. 

Here, we will take a closer look at HMRC Compliance Checks, the process that is followed, and what one may mean for you. 

What Are HMRC Compliance Checks?

HMRC faces increasing pressure through internal targets to increase the amount of tax it collects from taxpayers and, therefore, to make sure that self-employed individuals and companies comply with the legal requirements. As a result, they may carry out a compliance check. 

While the term “compliance check” sounds quite informal, in fact it is simply another way of saying “tax investigation”. HMRC must have a reason to believe that tax is underpaid if they initiate compliance checks. 

What May Trigger Compliance Checks?

A risk-based system is in use by HMRC to spot any companies that may be failing to comply with the required tax obligations. If you are notified that you are having a compliance check carried out, HMRC will probably have identified that you represent a high risk.

This is most probably because your returns are fluctuating significantly between tax years, your returns are often sent in late, you are failing to take appropriate care of completing your tax returns and are making errors, you are employing your spouse on terms that are deemed to be overly favourable, or you have been reported by an individual that you know. Ex-spouses and former business partners will commonly tip off HMRC about a potential tax issue. 

What Will Happen During Compliance Checks?

The first stage involves receiving an HMRC information notice telling you that compliance checks will be carried out into your tax affairs. HMRC will also request that certain documents and information are sent to them, typically within a 40-day period of the issue of the notice. If you cannot respond by this deadline, it is imperative to get in touch with HMRC to tell them so. 

Before responding to this notice, it is wise to consult a tax adviser. They can help you to gather the required information and can respond on your behalf to requests for any further details. Failure to respond will result in a formal information notice and potentially a fine as high as £300, with daily fines of as much as £60 until HMRC receives the requested information. 

If HMRC remains unsatisfied with the information that you send, it may wish to find out more about your taxes. Representatives may then visit you at your premises. Most visits will be announced and you will have a minimum of seven days’ notice in writing. Inspecting officers can examine anything from accounts and tax returns to VAT, NICs and PAYE. In some cases, HMRC representatives may arrive unannounced. In such cases, they give you a factsheet, inspection notice, and their ID. You are allowed to refuse their entry unless the notice is authorised by an independent tribunal. 

Following the check, you are sent the results which tell you either that your tax matters are correct or whether some errors have been found leading to underpayment of tax. In cases where your tax is correct, the check is closed and there is no adjustment. If an underpayment is discovered, though, you have to pay the required extra tax within a 30-day period. You may also need to pay a financial penalty depending on why you underpaid tax. 

How Long Will The Process Take? 

There is no set length for a compliance check since each one depends on its scale and scope. A straightforward business expenses or PAYE enquiry may be completed quite quickly however a complex investigation covering your entire tax return may take a few months. Most checks will be settled within 3 months. 

What Are My Rights With Regard To Compliance Checks?

You have several rights when defending yourself against a compliance check. 

You have the right of representation by a tax adviser, accountant, or even a relative or friend. You are also entitled to consult your adviser before making a response to HMRC. All of your dealing with HMRC must remain confidential and you have a right to complain if you believe you have been treated unfairly during the process. 

What Potential Penalties Could There Be After A Compliance Check?

If it is discovered by HMRC that you have made a tax underpayment or your tax return is inaccurate, a financial penalty can be levied which will be determined by the reason for the error and the efforts made to be open and responsive throughout the enquiry process. 

Penalties are potentially charged when inaccuracies lead to an underpayment, overclaim or overstatement of tax. They are also charged when inaccuracies are deliberate, deliberately concealed, or careless. 

Should the check determine that you took a reasonable amount of care to ensure your tax return was accurate, as an example, by ensuring you keep accurate records or by checking with your adviser before you filed your tax return with HMRC, there will be no penalty levied. 

If HMRC decides that a penalty must be paid, they will take several different factors into account to determine how much you will owe. These include: 

  • The PLR (potential lost revenue) value. Your penalty will represent a proportion of that figure.
  • The behaviour causing the inaccuracy. Higher penalties are charged if the inaccuracy was deliberately concealed. 
  • Whether the disclosure was unprompted or prompted. If an inaccuracy is disclosed before HMRC finds it, the penalty is lower. 

If another penalty has been applied already to the same duty or tax, a reduction in the overall penalty will be considered. Nevertheless, in some cases, it may turn out that the total amount of financial penalty owed will be higher than the amount of tax owed. 

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