What if one day you receive an envelope in the post? Inside it is a letter from HM Revenue & Customs (HMRC) telling you that they are making some enquiries into your tax return or tax credit claim.
Under new tax laws, you may even be asked to provide information before you have actually submitted a tax return. HMRC can request sight of information or documents that they ‘reasonably require for the purpose of checking your tax position’.
How will you feel? You might be worried or confused or instead you might feel irritated or even angry? It might be a mixture of these.
And what do HMRC mean by their letter? Do they think that you have actually done something wrong? And, if they don't know whether you have, why, then, are they going to ask questions?
You may hear HMRC refer to an enquiry, a check, an intervention, an investigation, or an examination. They all amount to pretty much the same thing, but there are strict guidelines for HMRC that they have to follow.
The first letter you get from them may quote certain parts of tax legislation. Do not let this put you off or scare you – they may have to quote this to comply themselves with the law.
In this part of the website we look at:
Why are HMRC enquiring into my affairs, and what should I do first?
What should I do next?
How should I act when I am dealing with HMRC?
Will HMRC give me any information to help me understand how an enquiry works?
What is the difference between an enquiry and a pre-return check?
What are the stages of an enquiry or check?
The opening letter
Supplying documentation and information
If HMRC ask for a meeting
What to think about regarding any possible meeting?
What to do before, during and after the meeting
Closing a self assessment enquiry
Getting professional help
What to remember - a summary
Why are HMRC looking at my return, or asking me for information even before I’ve sent one in, and what should I do first?
The first thing is not to panic. Some enquiries (you might hear them called checks, examinations or investigations, but they are much the same thing) are chosen on an entirely random basis - you won't know if you have been chosen at random and you won't be told. This notification does not automatically mean that someone thinks you have done something wrong. You will first be asked for any information required to be produced voluntarily, and only if you have not provided the information requested should you get a more “formal” request.
- HMRC carry out random enquiries so as to test their overall systems. So it is entirely possible that you have done nothing wrong at all. It is just the luck of the draw if they have chosen you.
- HMRC queries arise because there is something they don't understand or they have some information which makes them think your tax return or claim might be wrong. Even then there is a good chance that you will be found to have acted correctly.
- HMRC employees are instructed to keep an open mind and also be aware of the possibility of errors in your favour as well as in their favour.
- If the letter asks just one or two simple questions, it is likely that this is a limited enquiry, often referred to as an aspect enquiry by HMRC where they just want to double-check information you have provided. HMRC may ask for documentation to support this information. In a full enquiry you may be asked more extensive questions and be asked to provide your business records if you are self-employed. The enquiry notice should specify whether the enquiry is a full or aspect.
- Don't assume that the enquiry notice or information notice will go away if you ignore it. It won't!
- If you know that you sent in your return with the deliberate intention of misleading HMRC or you cannot really be sure whether the information you provided was right or wrong - it is likely that you now need professional tax or legal advice to help you sort things out.
The rest of this Guide is not for you.
- However, the vast majority of people who receive an enquiry notice of some sort cannot think why there is a need for HMRC to ask any questions at all. It may just be a random enquiry, or it may need just a one-line response.
- Whatever the request, it can be an unsettling or even frightening experience. Can you be entirely sure you read and understood everything you should have? Probably not. HMRC realise that and should approach the enquiry with understanding.
- Make a folder and in it keep everything to do with the enquiry. For example:
- you should keep all the letters you receive and copies of any that you send to HMRC.
- you should keep notes of all telephone conversations you have with HMRC to record what you, and the enquiry officer, said, the date and time of your call and the name of the person to whom you spoke.
- keep a record of any documents or other information which you give to HMRC along with the date of sending, the address to which it was sent and the reference number. You may wish to get a copy of any documents taken away that you may require in the meantime. This must be given free of charge. More information is available in our factsheet.
- Sending by recorded delivery will ensure that in the event of a dispute you can prove when and where the posted items were delivered. If you can, take a copy of anything you send.
- Hopefully the above introduction might have helped you with your immediate concerns but quite often the letters HMRC send are not as friendly as they could be and you may feel threatened. Don't be.
- The best way to go forward with an enquiry is if you can take control of the process as soon as possible. Ask yourself if you are likely to achieve more by confrontation or acting in a spirit of co-operation.
- Remember, HMRC have various powers to enable them to obtain information and, overall, it could cost you more, both in money and stress terms, if you are unco-operative.
- But co-operation does not mean that you have to:
- Put up with discourtesy or undue delay from HMRC. You are entitled to complain about this just as you would in any other situation
- Allow HMRC to abuse their powers
- Automatically agree everything which HMRC might put to you
- Comply with very time-consuming or expensive requests for information without good reason or in an unreasonably short time
- Volunteer information you have not been asked for (although there may be times when HMRC have misunderstood something so completely that it will save time to clarify the facts).
- It does mean that you should:
- Answer reasonable and relevant questions truthfully to the best of your knowledge
- If you have agreed to supply information by a particular date do so, unless there is good reason for being unable to and keep HMRC informed of the reason for any delays in providing the information
- Avoid any temptation to vent your feelings of irritation, annoyance or anger, whether on paper or at meetings.
- At the start of any self-assessment enquiry, you should be given HMRC leaflet IR160.
- With the opening letter you may have received a Question and Answer leaflet if you are subject to a full enquiry and are unrepresented. You might also be sent one or more of a range of compliance check fact sheets. Have a look at LITRG’s own versions of these focusing on your rights, rather than HMRC powers: see here.
- The opening letter in a self assessment tax enquiry should specify that you have the right to apply for the enquiry to be closed at any time. This is explained in more detail in the Code of Practice below.
- You should also receive a Code of Practice booklet, Enquiries into Tax Returns by Local Offices (COP11), in all but the most straightforward self assessment enquiries. In the most straightforward self assessment enquiries you may receive a short Code of Practice instead, but you can at any time request the full Code of Practice.
- For a tax credits examination you should receive leaflet WTC/FS2 with the opening letter and leaflet WTC/FS1 for a tax credits enquiry. The difference between a tax credits enquiry and a tax credits examination is explained under the heading: A stand-alone tax credits enquiry. Normally it is in your interests that a self assessment enquiry and a tax credits enquiry should be worked together, so that you can get clearance of both at the same time. The result of one can affect the other. See further information under the heading A self-assessment enquiry which then leads on to a tax credits enquiry.
- For a pre-return ‘check’ you should receive CC/FS1 entitled ‘Compliance checks – general information’ and CC/FS2 ‘Compliance checks – requests for information and documents’.
Other leaflets that you may receive
IR 160 - HMRC enquiries under self assessment. This explains how settlements are negotiated and would normally only be issued if the inspector considers that your accounts or returns are incorrect and a penalty would be due as a result.
In Tax Credits examinations/enquiries:
WTC/FS2 - Tax credits examinations
WTC/FS1 - Tax credits enquiry
Take time to read these - they are generally well written, if difficult in places to understand. They will tell you, amongst other things, how the enquiry will progress.
- If you have submitted a return, HMRC can investigate it under formal powers of ‘enquiry’. Enquiries can only be carried out within certain time limits, and subject to certain safeguards for the taxpayer.
- Additionally, since April 2009, HMRC have been able to carry out informal, or pre-return, checks. They will generally use those powers if they want to check how you are keeping business records, or if they think something might be wrong and they want to put it right immediately rather than wait until after you have submitted a return.
- HMRC cannot use these powers if a return has already been submitted, unless they have reason to suspect that you have underpaid tax or been given too much tax relief.
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- In the opening letter of a self assessment enquiry, HMRC should only be seeking documents and information on which they can judge the accuracy of your return or claim - nothing more. When opening a pre-return check, they have wider powers to ask for information and documents that they reasonably require to check your tax position.
- When you get the letter check in their leaflet whether HMRC is within the time limit for making an enquiry in the first place. See our rights factsheet on your rights and safeguards.
- Is what they are asking for reasonable? If you think it isn't, ask why it has been requested. Note that if this is a pre-return check, the law requires them to ask only for information and documents that they reasonably require for checking your tax position. Tell the officer if you do not think his request is reasonable. Ultimately you can appeal to an independent tribunal if you do not agree.
- Are you able to supply the documents and information within the time limits given? Again, if you think that you have not been given enough time, contact HMRC to ask for a longer period telling them why it is needed.
- At each stage of the enquiry or check you will be asked informally for any information which HMRC are seeking - under normal circumstances they are obliged to do this before using any formal powers.
- If you are asked questions or asked to give explanations (or HMRC have expressed a specific concern), at this stage, you should give them full detail. There may be a simple answer which could enable the enquiry to be closed.
- They would have to reject these explanations, with reasons, before they can justify asking about something they had not asked about previously.
- If you feel uncomfortable with replying in a straightforward way, then seek professional help.
- Remember that for self assessment enquiries you have the right to apply for the enquiry to be closed at any time – this does not apply, however, to pre-return checks.
- If you do not supply the information and/or documentation within the time limit, HMRC may issue a formal notice for their production. This formal notice will provide a fresh time limit and also warn that you may be charged a penalty if you do not supply what has been requested and within the time allowed.
- However, what HMRC asks for must be relevant for checking that return, or reasonably required for checking your tax position, and you must actually have or be able to obtain any documents requested (they must be in your power or possession).
- If you feel that the above is not the case or consider that you have not been given sufficient time to supply the information and/or documentation, you should contact the officer as soon as possible.
- If you are unable to reach agreement with the officer in a tax enquiry, you can usually appeal against the notice, either by asking HMRC to carry out an internal review of your case or by appealing to an independent Tribunal. If you want more information about HMRC's internal review and the appeals process you can download the leaflet using the link or ask HMRC for a copy – HM Revenue & Customs decisions – what to do if you disagree.
- Occasionally the law does not allow you to appeal – when HMRC are asking you to show them your ‘statutory records’, or in the rare situations when the Tribunal has already approved the issue of the notice.
- If you have business premises, you can suggest that any records are reviewed there, or sometimes the enquiry officer may suggest this. However, if you prefer, you can ask that records are examined at the HMRC office or at the premises of a professional adviser, if you have one.
- You have a range of other rights and safeguards which are explained here in relation to pre-return checks, and here in relation to self assessment enquiries.
- Meetings with HMRC, which previously were not a matter of routine, have become more common since 2008. You do not have to attend a meeting. It is up to you whether you agree to meet or not.
- There are a number of things to consider. Aside from the matter of co-operation, which has already been mentioned, a meeting may shorten the length of the enquiry, be more cost-effective and limit continuing correspondence.
- It may well be that you want a meeting yourself, for these very reasons, and, if so, you should ask for one.
- You can take a friend or adviser along with you, for support, if you want and you can ask for any meeting to be held on your home ground.
- The HMRC enquiry officer cannot insist that it be held at any particular venue and the HMRC have no right of access to any premises under their ordinary statutory powers.
- If you are seeking a meeting it does not have to be pre-arranged but it is to your advantage to try to agree a date, time and place.
i. Your time and costs of attendance.
ii. The stress you might be caused.
iii. As above, a meeting might actually reduce your costs of the enquiry.
iv. You can ask to receive an agenda prior to holding the meeting - this should prevent too many surprises.
v. The enquiry officer may see a refusal to meet as a sign that you are not co-operating with the enquiry. If you decide against having a meeting make sure that you make it clear to HMRC that this is not the reason for your reluctance to meet if, indeed, a meeting really is necessary.
vi. A meeting in progress can be ended at any point; for example, if the enquiry officer acts unreasonably or aggressively or for any other reason.
vii. You can ask for a break during the meeting if you want one. Should you have special personal needs, to assist your attendance, let HMRC know beforehand.
viii. You do not have to agree to discuss your tax affairs with HMRC in front of your spouse or co-habitee, or your business partner(s). You each have a right to privacy.
ix. If you refuse a meeting and reach no agreement in the enquiry with HMRC, HMRC may, anyway, have the opportunity to ask its questions in a tribunal hearing.
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Before the meeting
1. Ask for an agenda and an idea from HMRC as to how long it will take.
2. Prepare beforehand - read the contents of your folder and take it with you to the meeting.
During the meeting
1. At the start of the meeting you are entitled to know of any clear errors which HMRC have found or any areas which concern them, having looked at the material which you will have already given to them.
2. Ask what these are, if any, before you agree to answer any questions. This will help you to consider whether their line of questioning is reasonable.
3. Regarding any subsequent questioning, any new areas of enquiry should only arise from initial findings and issues should not continue to be raised piecemeal.
4. If, when you ask about the areas giving HMRC cause for concern, you are told that HMRC are satisfied with the information or paperwork which you have provided, then the enquiry should be concluded.
5. In such a circumstance you should not have been asked for a meeting and you might then wish to lodge a complaint and consult the HMRC complaints publication - Complaints and putting things right.
6. The real benefit in setting out the areas of concern prior to answering questions in a meeting is that it should limit the enquiry officer pursuing fresh lines of enquiry in cases where he is struggling to find evidence of inaccuracies.
7. When in the meeting, if you don't know the answer to a question do not be tempted to guess. Say that you will try to find out the answer and provide it later.
8. For example, you may be asked about your personal and private expenditure pattern in a particular year where the officer is trying to show that you do not have sufficient money on which to live if your accounts/tax return figures are correct.
9. Don't worry unduly about this - the officers are reminded in their instruction manuals that it is genuinely difficult for anyone to remember what was spent last month - let alone last year.
10. Never feel intimidated by HMRC; remember, you are the only one who would, in any event, know the true figures.
11. Tell the officer if you don't understand something. Ask him to explain. Always be prepared to ask why he is asking for, or saying, something if you cannot see a connection to the enquiry.
12. You might want to take some brief notes or, if a friend/adviser accompanies you, ask them to take notes. You can then check these against the notes supplied by the officer (see below).
After the meeting
1. Ask for a copy of the notes of any meeting. HMRC are obliged to take notes and provide a copy if requested. The officer should not allow you to commit yourself to anything which you know is factually incorrect.
2. Read the notes quietly at home and make sure they are right. You do not have to sign them or confirm that they are correct. But normally it is in order to do so in straightforward situations.
3. Ask for any mistakes, misunderstandings or anything in the notes which could be misinterpreted to be corrected - or provide your own record.
4. There may be something with which you disagree in the notes - this is your opportunity to put that on record or provide explanatory information if your comments were taken, and noted, out of context.
5. If you later, in hindsight, think that you gave inaccurate information at the meeting you should correct it now.
- Once either you have provided the specific information HMRC require or following a meeting you are aware of the adjustments that will be made to your tax assessment(s), the enquiry is finished and a formal written closure notice will be sent to you setting out the conclusions. You have a right of appeal against these conclusions.
- Bear in mind that if at any time during an enquiry, you consider the enquiry officer is prolonging it unreasonably, in most cases you can ask an independent tribunal to direct that it be closed.
- They must make HMRC close the enquiry unless they are satisfied that the enquiry officer has reasonable grounds for continuing.
- There is no restriction on the number of occasions on which this can be done during the enquiry although the tribunal might not be prepared to accept repeated applications made without good reason.
- Your rights and safeguards when undergoing an enquiry into your tax return are explained in our factsheet.
- Whilst HMRC, as part of their enquiry, should check that you have claimed all the reliefs and allowances to which you are entitled, you should ask them to confirm that they have done so.
- Enquiry officers in HMRC now have a duty to educate, inform and advise (it is called enabling) - you are entitled to expect this service to enable you to avoid a future non-random enquiry and, possibly, future tribunal processes.
- If you were subject to a self assessment enquiry and your records were found to be lacking you should be told what was wrong with your accounting system and how it should improve. You should also be told what records to keep and how often they should be completed.
- HMRC may propose to add penalties to any settlement of the enquiry. These have to be justified and they are not automatic. HMRC cannot charge a penalty if it is established that you were not culpable (that is, you were not to blame for any additional tax becoming due), or you made a genuine mistake despite taking reasonable care to get your return right.
- HMRC publish leaflets on the subject of penalties and they can be found here for self-assessment and here for tax credits. Our own factsheet on penalties, focusing on the taxpayer’s rights and safeguards, is here.
- The law also provides for HMRC to exercise their discretion to discount a penalty in cases where a penalty may be due. Factors such as co-operation, voluntary disclosure and where the errors or omissions were not serious can be taken into account and reduce a maximum penalty. You may hear these referred to by HMRC as “Telling” “Helping” and “Giving Access”.
- If a penalty is being charged purely because of a “careless inaccuracy” then the penalty could be suspended, and conditions will be imposed which would help you avoid penalties for careless inaccuracies in the future. After the agreed period of time, if the conditions have been met, the penalty will be cancelled.
- There are different rules for penalties depending on whether there has been a failure to notify, or for inaccuracies. The rules are quite complex and you may hear of penalties mentioned under “Schedule 24” or “Schedule 41”. You can read more about this here.
If you are concerned that you are not being treated fairly on a penalty then take advice from a professional adviser. See the next section for more information on this.
So the things to remember are:
- Organise yourself and take control
- Decide whether you need professional help
- Deal with HMRC's request for documents or information
- Consider any request for a meeting
- Be honest and, in general, answer only what you are asked
- Do not without question accept the Revenue's proposals for closing an enquiry, particularly if penalties are involved or if both a self-assessment and a tax credits enquiry have been involved. (See here for more detailed information.)
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