This is a guest post written by Mike Smith, experienced HMRC mediator and senior director at Company Debt, business debt advisers.
Statistics show that HMRC has hardened its attitude towards tax avoidance as the number of penalties issued by the taxman for underpaying tax “deliberately” has increased dramatically in the last few years. With this in mind, it’s crucial that once you’re informed that you’re going to be the subject of a compliance check that you take it seriously and do everything possible to provide a full answer to HMRC within the specified deadline.
It’s worth noting that compliance checks don’t always mean that you have underpaid tax as a proportion of returns are selected at random for investigation. Here, we detail the process so that you’re aware of what’s involved and less stressed out when dealing with HMRC.
The first step is an information notice from HMRC, informing you that a compliance check is being carried out. HMRC will request certain information and/or documents typically within 40 days from the date the notice is issued. If you can’t meet the deadline, contact HMRC to arrange another date.
Before responding, you must decide whether you need help from a tax adviser as well as collect the information requested. If at this point you notice that you have got something wrong, consider telling HMRC immediately as this could reduce the penalty.
If you don’t provide the information requested, you’ll be sent a formal information notice. This should be avoided as it could result in a fine of up to £300 for failing to comply. You may also be fined up to £60 a day until the information is provided.
HMRC will contact you to give at least seven days’ notice of a visit to your business premises, tax adviser’s office or home. This is sanctioned by an authorised HMRC officer or tribunal, and the date and time must be agreed with you beforehand. Officers have the right to inspect business records or premises, but not to enter your home without consent unless business records are kept there.
These are never random, and you should seek professional advice before letting in officers. Like announced visits, the notice is signed by an HMRC officer or a tribunal. It’s worth remembering that you can’t be fined for refusing entry when the notice is signed by an officer. However, there is a £300 fine if the notice has been signed by a tribunal and there is no ‘reasonable excuse’ for not permitting entry. The accountant being absent is considered a reasonable excuse.
After the compliance check
You will be sent the results of the check, detailing whether you have underpaid tax. If you have, any additional tax needs to be paid within 30 days. Once it’s clear why you’ve underpaid, HMRC will decide whether to charge a penalty for late payment or non-disclosure of taxable income or gain. These penalties can exceed the actual payable tax.
HMRC penalties are on a scale with inaccuracies and innocent errors at one end and deliberately providing incorrect information at the other. They are calculated as a percentage of HMRC’s Potentially Lost Revenue (PLR). Therefore, if you’re helpful and tell HMRC as soon as you can, carelessness can avoid a penalty even though HMRC can fine up to 30% of PLR in these cases. Deliberate and concealed behaviour triggers anything up to 100% of PLR.
Finally, compliance checks are a fact of business life. They can be stressful but if you manage your business responsibly and have solid financial records, you’ll have every chance of getting through the process without a hitch.
About Mike Smith
Mike Smith is a senior director at Company Debt and among the UK’s most experienced mediators with HMRC. He’s been working in the field of company rescue and insolvency for 40 years.
For more information about tax compliance checks, you can also visit Gov.UK by clicking here.