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HMRC Investigation and Tax Enquiries

Published by UK Property Accountants
Published Date: September 11, 2023 , Updated Date: December 28, 2023

So, you have just received a nudge letter from HMRC and are not sure what to do. Is it informal enquiries you are facing? Or maybe disputes in tax tribunals and courts. These processes can be very expensive and stressful for taxpayers. Trust me when I say we understand your pain.

In this blog, I am going to take some of the most asked questions that you may have related to HMRC investigation and tax enquiries and try to address them one at a time. Ready!!

Let’s start from the basics:

What is tax enquiry anyway?

Enquiry here carries normal dictionary meaning i.e., seeking information, asking and questioning.

A tax enquiry is an investigative procedure conducted by HMRC to meticulously verify the accuracy and completeness of the information provided in a tax return. This involves HM Revenue and Customs asking specific questions about the return, conducting meetings, and thoroughly examining the taxpayer's records. It is important to note that HMRC possesses the authority to initiate an enquiry into any tax return.

Does HMRC have the power to enquire into tax returns?

Yes, HMRC does have the right to make enquiries into any tax return. This includes both original tax returns and subsequent amended tax returns.

The only condition HMRC must oblige before initiating enquiry is they must provide the taxpayer with written notice.

Types of Enquiries HMRC Carries Out

The types of enquiries HMRC carries out are:

Full enquiry

Aspect enquiry

Random check

Full Enquiry

As the name suggests, full enquiry covers the return, it tries to address major risks in the return.

Aspect enquiry

Here, HMRC identifies particular areas of a return that they concentrate on which is referred to as issues or aspects.

Random check

These cases are randomly selected from entire population. These cases are taken so that:

  • HMRC can assess the volume of non-compliance and improve their judgement of the tax gap,
  • Supply further data to help HMRC with their risk assessments, and
  • Ensure that HMRC checks all areas of SA population not only those perceived as higher risk areas                       

What should I do if I receive a nudge letter from HMRC?

An enquiry is opened once you receive the opening letter from HMRC.

When you initially receive a letter from HMRC, they make It clear on whether they are enquiring into the whole return or particular entries. (EM1560)

Check out "HMRC internal manual Enquiry Manual" for more details.

Usually, when you initially receive an enquiry from HMRC, the letter explains to you what risks have been identified and what information you are required to provide.

You need to start gathering the information, and relevant documents to send to the HMRC.

Nudge letter from HMRC

Remember, HMRC initially wants to understand the transactions, so do not panic. You can always ask the HMRC officer who is handling your case why certain questions have been asked.

HMRC has a set of guidance where the rate of penalty differs based on your behaviour. For example, if you have not disclosed your rental income which was due more than 12 months ago and you have recently received a letter regarding the same. The penalty rate they can charge you can range from 20% to 30%.

Now, if you have been cooperative with them and help them with all the information, they need they will charge you with a minimum penalty i.e., 20%.

So, a key takeaway here is to cooperate with HMRC and provide them with the information they require within the given time frame.

What are HMRC trying to find out?

This depends on the type of enquiry HMRC has started. Usually, they enquire if they have a doubt in some figures of your return, to see whether or not the tax liability was correct, was there an understatement of tax liability, etc.

Sometimes, If HMRC thinks that you have not disclosed any income in previous years they send you a nudge letter. In this case they are trying to find out your actual taxable income and your tax liabilities.

Can an enquiry happen before I have sent in my tax return?

HMRC enquiry is based on the returns you have submitted. So usually, an enquiry happens after the tax return has been filed.

However, HMRC can send you a nudge letter to disclose any income which you failed to in previous years.

What rights do I have in an enquiry?

Rights of the taxpayer during HMRC enquiry

We have a separate article regarding this, please find the link to the article below for more information.

Does HMRC have a time limit for enquiries?

Yes, the time limit for voluntary returns is 12 months from the date a voluntary return is received.

For late filed returns and amended returns, an extended enquiry window applies i.e., the quarter next following the first anniversary of the day the return was made.

Quarter days are 31 Jan, 30 April, 31 July and 31 October. (Ref: EM1506)

In case of undisclosed income, if HMRC finds out you have undisclosed income HMRC can go far back up to 20 years.

Can an enquiry result in a change in figures in my tax return?

If it was concluded that there was an error when filing the return then yes, it can change the figures in your tax return.

If the tax liability is understated, you will have to pay the lost tax along with any interest and penalties.

What should I do if I cannot deal with an enquiry just now?

If you do not think you can deal with an enquiry now, you should contact HMRC as soon as possible and explain them the situation.

You may suggest alternative date and must make sure to comply with the requirements within the given time frame.

How can HMRC find out about my rental income?

HMRC has access of information from land registry, stamp duty land tax office, agents have reporting requirement to HMRC among other. They can scrutiny information and track down If you have any undisclosed rental income.           

How to Contact HMRC?

The telephone number and email address of HMRC is usually given in the nudge letter itself.

For general contact number you can visit HMRC site.

How can UKPA Help?

Our tax experts at UKPA have hands on experience dealing and negotiating with HMRC. We can help you disclose your information and communicate with HMRC in right way.

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