Myths and truths about HMRC’s tax investigation powers
Guidance for accountants – and clients – on HMRC’s investigative powers.
One of HMRC’s responsibilities is to check that the correct amounts of tax have been paid at the right time. To do this, HMRC may need to:
gather information and examine documents
inspect business premises and inspect business documents on those premises.
There are safeguards to ensure that HMRC acts reasonably and that any action it takes is appropriate to the circumstances, and to ensure that HMRC does not unreasonably interfere with a person’s rights under the Human Rights Act.
The information and documents that an HMRC officer can request must be reasonably required in order to check a person’s tax position. Information can only be reasonably required where it could affect a person’s tax position. If the information could not affect a person’s current or future tax position, it is not reasonably required.
The restrictions on the types of documents and information that HMRC can require or inspect include the following:
Old documents: these are usually documents created more than six years ago. However, HMRC can request documents older than that if they affect the current tax position (such as a purchase agreement, in order to determine the chargeable gain on a capital disposal). HMRC may also need to see an old document where they have reasonable grounds to suspect that there may have been a deliberate error, which means that the assessment time limit could be extended to 20 years.
Appeal material: these are documents that ‘relate to the conduct of a pending appeal’. Such documents are usually brought into existence as part of the preparation for the presentation of a tax appeal.
Personal records: these are records concerning any individual’s physical, mental, spiritual or personal welfare. Any document containing welfare information is very sensitive. It follows that there is a strong presumption in favour of personal privacy, and so there are restrictions on HMRC’s power to request information containing personal information.
Journalistic material: these are materials acquired or created for the purposes of journalism. Material is journalistic material only if it is in the possession of a person who acquired or created it for the purposes of journalism, that is a journalist, or unsolicited material sent to a person with the intention of it being used for journalism.
Legally privileged information or documents: legal professional privilege is a very important common law rule that protects from disclosure certain communications between a legal professional and the person who is their client. This applies whether the communications are held by the legal professional or the client. Information is privileged if a claim to legal professional privilege could be maintained in legal proceedings.
Auditors’ statutory audit papers: as a general rule, an auditor cannot be required to provide information or produce documents that belong to the auditor if they were created for the purpose of carrying out the audit. Audit papers in the hands of anyone other than the auditor who created them are within the scope of HMRC’s information and inspection powers.
Tax advisers’ papers giving advice: HMRC cannot require a tax adviser to provide information or produce documents that belong to the adviser if the purpose of the information or documents was to give or get advice about another person’s tax affairs. This protection only applies when the notice is given to a tax adviser. It does not apply when the notice is given to the person whose tax position is being checked.
Formal and informal enquiry: an HMRC officer has the power to either correct a return informally or open a formal enquiry (by issuing a formal enquiry notice), and each of these processes is discussed below.
Correcting a return - informal enquiries: an HMRC officer can, within nine months of receiving a self-assessment tax return, amend the return, without opening an enquiry, in order to correct an obvious error or omission. ‘Obvious’ means that there can be no doubt what the correct entry should be. This could include correcting arithmetical errors, transposition of incorrect figures and errors of principle.
An HMRC officer can also amend the return if he has reason to believe it is incorrect based on information already held and where no more information is needed.
The taxpayer has no right of appeal against a correction, but does have the right to reject it by giving notice in writing within 30 days of the date it was issued by HMRC. If an appeal is made, it means that the correction has no effect and the self-assessment is put back to the original figures.
Even if the taxpayer does not reject the correction in the time allowed, he may be in time to amend the return. In such circumstances, an officer can only dispute the amendment by means of a formal enquiry into the amended return.
An informal request for information is not the same as formal enquiry. Not recognising the informal approach as an enquiry leaves the door open for the same or another inspector to open a formal enquiry later. Don’t forget that if the matter has been concluded under a formal enquiry it would prevent HMRC opening a new enquiry into the same matter. Essentially an HMRC officer is bound by the decision of the first officer and HMRC cannot change their minds on information previously available to them. This has been successfully argued by the taxpayer in Scorer V Olin Energy Systems Ltd.
Opening an enquiry An HMRC officer can enquire into a return by giving written notice to the individual, sole trader, partnership or company concerned. For an enquiry to be valid, it should:
be given in writing
set out whether the whole of the return is under enquiry or just one or a few specific entries
explain what information and documents are required
contain a time deadline by which the information and documents must be submitted or made available.
HMRC should state the specific concerns identified in the case in question rather than asking for general papers.
The vast majority of enquiries are launched after a risk assessment has been undertaken, although some random enquiries also take place. Previously, when HMRC wanted to check one item in a tax return this was called an ‘aspect’ enquiry and when HMRC wanted to open an in-depth enquiry, this was called a ‘full’ enquiry. Now, however, HMRC no longer differentiates between full and aspect enquiries and both are referred to as a ‘compliance check’.
While the names have changed, the enquiry powers have not. Enquiries into self-assessment tax returns or amendments are launched under TMA 1970, s9A, within 12 months of the submission of the return.
The taxpayer should consider carefully how to respond to an enquiry because if there is an error, the way in which they co-operate with HMRC can affect the penalty that may be payable. For guidance about penalties and how they can be mitigated, please see our article Tax penalty regime - mitigation and suspension