Navigating tax disputes with HMRC can be a complex and daunting process. This "need to know" series sheds light on the essential elements. In this note, we cover what to expect when HMRC open an enquiry into your tax return.
What to do when you receive a notice that HMRC are opening an enquiry into your tax return?
When you receive a notice from HMRC, you should do the following.
Check the validity of the notice
HMRC can open an enquiry into any tax return filed within the past 12 months. For an enquiry notice to be valid, it must be sent:
- within 12 months of the date you filed the tax return which is being challenged;
- to the taxpayer (and not, for example, to their agent); and
- to the correct address.
If there are any errors in the way the notice has been issued, you should communicate this to HMRC.
Identify the scope of the enquiry
Understand whether the enquiry is limited to certain aspects of the tax return or if it covers all aspects of the tax return. Note, however, that once HMRC open an enquiry into a tax return they can look at any aspect of that tax return.
Be cooperative
Do not ignore the notice, even in cases where you believe it has been issued in error. This may lead to further, more formal (and often much wider) requests for information.
Have a plan
Whether or not you instruct an advisor to assist, you should consider preparing a response strategy. For example, can you identify areas that will become a focus for HMRC? Is it best to anticipate questions in order to take the initiative? What are the implications of HMRC's line of questioning? Similarly, of course, it may be that any enquiry is entirely routine.
Information requests
Enquiry opening notices often contain informal requests for certain categories of information. HMRC have the right to request information and/or documents which are relevant to the enquiry and reasonably required to enable them to complete their review of the tax return. While this is a broad power, the Courts have engaged in a balancing act between what HMRC require to check a taxpayer's tax position and ensuring that enquiries are proportionate.
Nonetheless, HMRC's powers remain far-reaching. They may request various documents, including financial accounts, financial records, payroll-related documents, VAT and/or NICs records, invoices, correspondence, and more. When providing HMRC with documentation, there are a number of categories of documents that can be subject to special rules. One of the most important categories concerns privileged material. You are not obliged to provide such material to HMRC but the rules on privilege can be complex and so are well worth keeping in mind.
When dealing with an information request, it is good to maintain a cooperative and collaborative relationship with HMRC, by complying with reasonable requests and managing their expectations. It is important to maintain an open dialogue with HMRC so that you can understand exactly what information is required and by when. It is typical HMRC practice to make informal requests for information and only rely on their formal powers in circumstances where they consider that they cannot otherwise easily obtain the information.
You should, however, be careful not to allow the information request to escalate into a fishing expedition, whereby HMRC make speculative requests for documents. HMRC often make broad requests for information but, remember, HMRC can only request information that is relevant to the enquiry and reasonably required. Do not be afraid to ask HMRC to be specific, to ask them what they are looking for and why, if you think that their requests are too vague or ambiguous.
If HMRC requests information or documents that are not directly in your possession but are within your power to obtain, you are generally required to make a serious effort to acquire and provide those documents. If you do not have (or have access to) the information which has been requested, you must inform HMRC. Information notices may also be served on third parties, such as banks and other financial institutions.
Failure to comply with an informal information request, without reason, may lead to more serious action. HMRC may issue a Schedule 36 request – a compulsory disclosure order which carries financial penalties and must be complied with unless it is successfully appealed.
Further information on HMRC's information powers will be covered in the second note in this series, titled "Information Notices and Privilege".
Closing the enquiry
Once HMRC have received and considered all of the requested information, they should issue a partial or final closure notice, stating their conclusions and making any amendments to the return required to give effect to those conclusions. A partial closure notice will end the enquiry on specific points, while a final closure notice concludes all aspects of the enquiry.
If you disagree with HMRC's conclusions, you can appeal the closure notice (first to HMRC and then to the First Tier Tribunal) in writing within 30 days of the decision. The appeal process is covered in further detail in a separate note in this series titled "Appealing a Decision to HMRC/the First Tier Tribunal".
Enquiries remain open until they are closed by HMRC. However, if you consider that HMRC have all of the information they reasonably require or if there are no outstanding information requests but HMRC are delaying the issuance of a closure notice, you may apply to the First Tier Tribunal to direct HMRC to issue one within a specified period. As this is an application to the Tribunal, you may want to consult a legal professional for assistance with doing this.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
