Even for entirely honest taxpayers, a letter from HMRC saying they are planning to open an enquiry can be a disturbing event. Whilst it will usually be advisable to take professional advice when HMRC open an inquiry, the article below details the most important points.
Time Limit for Enquiry
HMRC do not have an open-ended right to raise an enquiry. Taxpayers who have done no wrong have a statutory right to consider their tax affairs are settled after a certain period of time. As such, HMRC can only enquire into a tax return within 12 months of receiving it. If a return has been amended for any reason, the deadline becomes 12 months after the last amendment. Please note that the taxpayer should receive notice of the enquiry by this deadline. If such notice is received after the deadline has passed, even if the letter is dated before, then it is not a valid enquiry.
Beyond this 12 month limit, HMRC do not strictly speaking have the power to raise an enquiry. However, they do have a power to call attention after the enquiry deadline has passed. They can raise queries to assist in this, but these can only be to clarify information they already have. They cannot simply raise speculative queries in the hope of finding something.
HMRC will often ask for a wide range of information and documentation to be sent to them. From their point of view, the more they have the more likely they will discover something to make the enquiry worthwhile. However, you are only legally required to disclose business affairs, then HMRC have no automatic right to see your private bank statements. To be entitled to these they would need to demonstrate good cause to believe that business transactions had passed through your private accounts. For this reason it is advisable to keep a separate bank account for business purposes, even if you are not a company.
If you cannot see why information is being requested, you can enquire of HMRC the reason they consider it reasonably required.
For business enquiries, HMRC will more often than not request an early face-to-face meeting with the business owners. The reasons stated for having this meeting are based around them getting a better understanding of the business. This includes the day-to-day activities, the way records are kept, and how it ties into the owners’ personal finances.
Whilst an enquiry officer may sometimes imply otherwise, there is no statutory requirement to have such a meeting. It also cannot be considered being obstructive to the enquiry to not agree to such a meeting.
However, depending on the nature and complexity of the business, such a meeting may actually be beneficial for the business owners as well. If they do not have a decent understanding of the business, HMRC will tend to raise more extensive queries to ensure they cover all relevant aspects of the business. A face-to-face meeting can deal with some of these issues quickly, saving lengthy and protracted correspondence later. If you do not feel comfortable holding such a meeting yourself, this initial meeting can be held with an adviser familiar with the business instead.
Accounting records for a business
HMRC are legally allowed to see all records kept for a business. Where applicable, this can include computerised records for the business if these have been kept. For smaller enquiries it may be practical to send records to HMRC for review. This may be the case if they simply want to verify an individual figure in the accounts rather than the accounts as a whole. For larger enquiries, it will usually be better to arrange for the records to be available for inspection at an agreed time and date instead. This can be at your own offices, or those of an adviser. As noted above, requests for information that goes beyond the scope of the enquiry should be queried.
If an inspection raises no issues of concern, you should simply receive a letter confirming that the enquiry is closed. If issues have been found, but no further information is needed to determine the effect, they will send a letter showing the adjustments required. A taxpayer has 30 days to appeal against this if they think it is incorrect.
Sometimes when an inspection of records raises concerns the HMRC officer will send a letter detailing those concerns. This may also ask for additional information and clarification if required. It is likely that a further meeting may be requested at this point. As with the initial meeting, the benefit to the business owners should be considered. You should make sure you have full details of everything that HMRC wish to discuss in advance. This will allow you to gather all the relevant information in preparation for the meeting. Should the discussion subsequently stray into areas you are unsure of, you should avoid making off-the-cuff responses. You should simply state that you will need to check and that you will provide a response in writing once you have done so.
Closing an enquiry
HMRC will only close an enquiry when they are satisfied that there are no adjustments required from their investigations. If they discover an error in one return, and it seems likely that it will have been in other returns, then they can seek to adjust those other returns as well. It is then up to the taxpayer to provide evidence to contradict this assertion. How far they are allowed to go back in these adjustments will depend on the nature of the issue discovered.
However, this does not mean that they can simply keep an enquiry open as long as they like. If HMRC fail to respond to correspondence, or keep making further unwarranted requests for information, the taxpayer can apply to have the enquiry closed. This will normally give HMRC 30 days to close the enquiry. A downloadable form for this can be found here. (tinyurl.com/yb99klfu)