What Is A Partnership Tax Investigation?

Gary Green
Gary Green
July 4, 2024

In cases where HMRC decides that they will start an investigation into a Partnership Tax Return, they send out a letter that quotes Section 12A TMA 1970. If you receive this letter, you should take it as formal notice that HMRC will be either looking at your whole partnership tax return or specific elements of it.

All Partnership Tax investigations are carried out by highly experienced inspectors. Usually, these cases are only opened once HMRC has carried out initial investigations that have revealed potential substantial liabilities.

Aspect Or Full Enquiries

A tax investigation into a partnership will typically be in one of two different categories – full or aspect enquiries.

Aspect enquiries involve cases in which HMRC is investigating only specific entries made on the partnership’s tax return. As such, they are often simpler to handle since only a limited aspect of the partnership accounts or tax return is being looked into.

A full enquiry, on the other hand, is far more complex since it means that HMRC is looking into all aspects of your partnership’s tax return. If HMRC is opening a full investigation into your partnership’s tax return, typically they will request sight of all the partnership’s business records and books. That includes all financial accounts that have been prepared by the partnership itself or by its accountant. These records will then be examined in detail by HMRC in order to determine whether all of the expenses and income have been reported correctly and claimed appropriately.

What Happens In A Partnership Tax Investigation?

Usually, HMRC is keen to meet face to face with the business partners during a partnership tax investigation. They do this to gain a better understanding of how the partnership functions and operates. While HMRC may request this meeting, that does not necessarily mean that the partners should attend. In fact, in an ideal world, such a meeting should be held without any of the partners actually being present. In cases where one or more partners are present, they should certainly not attend unrepresented.

While HMRC’s main concern when opening this type of tax investigation is establishing the right amount of profits, HMRC may often use the opportunity to then go on to look more closely at other taxes related to the business and even the partners themselves. That means they may start to review the PAYE and VAT aspects of their operations in order to determine whether any irregularities exist. Any adjustments arising from an investigation will impact the partnership loss or profit declared by all of the partners on their own self-assessment tax returns.

What Could Be The Outcome Of A Partnership Tax Investigation?

An HMRC investigating officer will carry out an enquiry into the partnership’s tax affairs, and depending what they uncover, they could launch a COP9 (Code of Practice 9) investigation or even a criminal investigation against you. Your case may be passed onto the Special Civil Investigations or Civil Investigation of Fraud department where the inspectors specialise in serious investigations into fraud. With this in mind, seeking professional advice is crucial.

Are Partnership Tax Investigations Random?

Although it may appear from the letter that you receive that partnership tax investigations are carried out at random, in fact that is not the case. Your partnership has been specially selected for investigation because it is suspected of having underpaid or of having serious financial irregularities. Therefore, an investigation into your partnership has already begun and further enquiries could easily get out of hand causing damage to both your business and even your personal life.

What Do I Do I I Receive Notice Of A Partnership Tax Investigation?

While HRMC investigations may on the surface appear to be quite simple, it is important not to be lulled into a false sense of security. It is easy for them to become far more serious. HMRC will typically request that you attend an interview but you are not legally required to attend.

Automatically, a partnership tax investigation will also extend to each partner’s personal tax returns, and therefore all partners in the company should be prepared to answer questions about their personal tax return’s partnership aspects. However, personal tax return non-partnership aspects cannot be opened unless a separate investigation under Section 94 TMA 1970 is opened. That must be issued separately.

Whichever partner completed the Partnership statement and Partnership Tax Return is the one who takes responsibility for investigation. If that partner is not available any longer, perhaps because they have returned, a different partner can be nominated. That nominated partner takes responsibility for informing all of the company’s other partners about how the investigation is progressing.

There is a lot of potential for error when dealing with partnership tax investigations. Therefore, seeking our professional advice from tax investigation specialists is the best course of action. This will often eliminate any need for partners to correspond directly or converse with HMRC. It will also ensure that matters are handled in the most effective manner to minimise any disruption or potential penalties for the business.

Although HMRC does have a raft of powers to help them to carry out tax investigations into partnerships, those powers are limited and having the support of a specialist in tax investigation is vital. Since they have in-depth knowledge and awareness of HMRC’s various powers, they can appropriately challenge how an investigation is being carried out by HMRC and ensure that the company and its partners do not suffer from further intrusion than is necessary into their tax affairs.

Tax investigation specialists can discuss with HMRC and the partners any discrepancies that become apparent between the records and accounts and work towards reaching a suitable agreement for both parties. If discrepancies are present, they can also work to minimise the consequential tax liability.

Should HMRC open a partnership tax return enquiry for your company partnership, you should waste no time getting in touch with professional tax investigation specialists to ensure the best possible outcome.

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