When self-reporting your tax returns, it’s a fact of life that not every individual or business will always be 100% truthful about how much they owe, or honest mistakes could be made that lead to underpayment. HMRC compliance checks take place to ensure the integrity of the tax system and businesses are usually selected due to some concerns about a tax return or accounts that have been submitted.
In this guide, we’ll take a look at the HMRC compliance check process and explore what it could mean for you and your business.
What is an HMRC Compliance Check?
HMRC is under increasing pressure to improve its tax revenues, particularly given the economic crisis the country now faces following the coronavirus pandemic. To ensure that businesses and the self-employed are complying with their tax responsibilities, it carries out what are known as compliance checks, to ensure they have appropriate systems and records in place to demonstrate their compliance with the tax system.
Although an HMRC compliance check might sound relatively informal, it is a formal tax investigation by another name. It is more serious than an enquiry into a tax return submitted by a taxpayer and HMRC will have cause to suspect tax has been underpaid before initiating a compliance check.
What Can Trigger an HMRC Compliance Check?
HMRC uses a risk-based system to identify potential businesses that may not be complying with their tax obligations. If you are selected for a compliance check then it’s likely that HMRC has identified a higher level of risk based on one or a combination of the following factors:
- Your returns fluctuate significantly from year to year
It’s normal for accounts and tax returns to fluctuate from one year to the next, but it’s more unusual for profits to fall or expenses to rise dramatically. There could be a perfectly good reason for this, such as the unprecedented hit many industries have taken from the pandemic, but it could also be symptomatic of improper accounting records and a lack of compliance.
- Your tax returns are often late
Submitting a late tax return will lead to a late payment fine. If it’s a one-off, then that may be all you hear from HMRC. However, if you consistently file your tax returns late or make payments after the deadline, that could trigger a compliance check.
- You don’t take care when completing your returns
If you consistently make mistakes on your tax returns then the all-seeing eyes at HMRC will start to take a closer look at your business. Taking greater care with your returns or working with an accountant can help to prevent mistakes.
- You employ your spouse on overly favourable terms
It’s not unusual for a business owner to employ a spouse and pay them a salary to do work for the business, but they do have to do some work! If they’re being paid a handsome salary but PAYE records show that they’re employed full-time elsewhere, HMRC may start to ask questions.
- You’ve been reported by someone you know
If a third party contacts HMRC and suggests that you’re not paying the taxes you should be, it may launch a compliance check to dig a little deeper. Old business partners and ex-spouses are common sources of a tip-off.
What Happens During an HMRC Compliance Check?
- Information notice
The first step of the process is being sent an information notice by HMRC. It will inform you that a compliance check is being carried out into your business’s tax affairs. It will request that you send certain information and documents, usually within 40 days of the notice being issued. If you are unable to respond by the deadline, you should contact HMRC to let them know.
Before you respond to the information notice, it could be advisable to seek the assistance of a tax advisor with experience of compliance checks. They will be able to help you gather the necessary information and respond to HMRC requests for further information. If you fail to respond, you will be sent a formal information notice that could result in a fine of £300 and a daily fine of up to £60 until the information is received.
- Announced and unannounced visits
If HMRC is not satisfied by the information it receives and wants to dig deeper into your tax position, HMRC officers could pay you a visit at your business premises.
The vast majority of visits are announced, with notice given at least seven days before the visit in writing, by way of a notice of inspection, or over the phone with written confirmation. The inspecting officers may look at anything from company tax returns and accounts to PAYE, VAT and NICs. The documents the officers are authorised to inspect must be listed in the written confirmation.
Alternatively, HMRC may decide that an unannounced visit is the best way to carry out an inspection. They will provide you with a notice of inspection and a factsheet (pdf) and show you their ID. You are within your rights to refuse the HMRC officers entry if the notice has been signed by an authorised officer. However, if the notice has been authorised by an independent tribunal and you refuse entry, you could receive a £300 penalty and be fined up to £60 a day until you let HMRC carry out the inspection.
If you have a reasonable excuse for not letting HMRC carry out an inspection, such as if your accountant or tax advisor is not present, you will not be charged a penalty.
- After the compliance check
You will receive the results of the compliance check, which will explain whether your tax position is correct or whether errors have been discovered that have led to an underpayment. If your tax position is found to be correct, then the compliance check will be closed with no adjustment. If HMRC discovers an underpayment, you will be required to pay any additional tax within 30 days, and depending on the reason for the underpayment, you may be required to pay a penalty that could exceed the actual tax payable.
What can HMRC Look at During a Compliance Check?
HMRC compliance checks can take a range of investigative approaches across every form of tax. Most commonly, the checks centre on self-assessment tax returns, but it can also include checks of:
- Your company tax return
- Your accounts and tax calculations
- PAYE, VAT and NICs
How Long Does the HMRC Compliance Check Process Take?
That depends on the scope and scale of the investigation. Straightforward enquiries into PAYE or business expenses can be completed relatively quickly, while more complex investigations that cover the whole of your tax return could take several months. On average, most compliance checks are settled in around three months.
What are the Time Limits for HMRC Compliance Checks?
HMRC can use compliance checks to investigate tax returns and payments up to five years and 10 months after the end of the tax year in question. However, it is common for compliance checks to take place within 12 months of taxes being paid or filed. If HMRC believes a taxpayer has been involved in fraud or negligent conduct, then the time limit can be extended by up to 20 years.
What Rights do Taxpayers Have During HMRC Compliance Checks?
Taxpayers have a number of rights that can help them deal with and defend themselves against an HMRC compliance check. That includes:
- The right to be represented – A taxpayer can appoint an accountant, tax advisor or even a friend or relative to handle the process on their behalf.
- The right to consult an adviser – Taxpayers will be allowed a reasonable amount of time to consult an adviser before responding to HMRC.
- The right to confidentiality – All your dealings with HMRC will be confidential.
- The right to complain – Taxpayers have the right to complain if they feel they have not been treated fairly by HMRC.
Although you do not have to comply with HMRC’s requests or provide assistance in its investigation of your tax affairs, it is in your best interests to do so. This will be taken into account and may reduce the penalties.
What are the Potential Penalties Following an HMRC Compliance Check?
If HMRC discovers that an underpayment has been made or there are inaccuracies on your tax return, your company may incur a penalty charge. These penalties are determined by the cause of the error. You may be charged a penalty if:
- The inaccuracy leads to tax being underpaid, overstated or over-claimed;
- The inaccuracy was careless, deliberate or deliberate and concealed.
If the compliance check finds that you took reasonable care to make your tax return accurate, for example, by keeping accurate records and checking with an adviser or HMRC before filing, you will not be charged a penalty.
If it is decided that you will have to pay a penalty, there are eight factors HMRC will take into account when determining the penalty amount.
- The value of the ‘potential lost revenue’ (PLR). The penalty will be a proportion of this figure.
- The behaviour that caused the inaccuracy. The penalties will be greatest when inaccuracies are found to be deliberate and concealed.
- Was the disclosure prompted or unprompted? In an unprompted disclosure, where inaccuracies are disclosed before they are found by HMRC, penalties will be less.
- The range the penalty falls within. Penalties can fall into one of six ranges:
|Type of behaviour||Unprompted disclosure||Prompted disclosure|
|Reasonable care||No penalty||No penalty|
|Careless||0% to 30%||15% to 30%|
|Deliberate||20% to 70%||35% to 70%|
|Deliberate and concealed||30% to 100%||50% to 100%|
- Deductions could be made to the penalty according to the quality of the disclosure.
- The penalty percentage rate will then be calculated using the penalty range and the deduction.
- The potential lost revenue will be multiplied by the penalty percentage rate to calculate the value of the penalty.
- Other reductions will be considered. For example, if other penalties have already been applied to the same tax or duty.
Do you Need Help With an HMRC Compliance Check?
If you have been informed of an imminent HMRC compliance check, we can help. Through the proper management of the process, the potential tax liability, interest and penalties can all be reduced. Call our team on 08000 24 24 51 or email email@example.com for a no-obligation discussion of your circumstances.