Enquiries in more detail
Enquiries can arise in connection with your Self Assessment tax return or a tax credits claim. On this page, we look at issues you might face if you are self-employed and HMRC opens an enquiry into your tax return.
There is detailed information about enquiries into tax returns and tax credits claims in the tax basics section. That section includes information on what you should do if it looks like there will be extra tax to pay, if you cannot reach an agreement with HMRC, if HMRC are enquiring into earlier years’ tax returns and discovery assessments.
What is a stand-alone Self Assessment enquiry?
Generally this is an enquiry into your Self Assessment tax return alone. Often it will be into one particular area of the return itself. This can lead on to enquiries into other areas of the return if HMRC consider this is necessary.
If you claim tax credits, it is very important that you do not finalise and agree any figures in a stand-alone income tax enquiry without understanding the possible implications for your tax credits claim that was not part of this enquiry.
What information might I be asked to provide?
HMRC can ask you to provide them with information or documents that may be reasonably required to allow them to check your tax position. This may include bank statements, invoices and receipts, for example.
I have been asked to provide details of my private bank and credit card accounts. Do I have to comply?
Any request for information or documents has to be reasonable. Make sure you ask why these details have been asked for. Do not feel you have to provide this information without checking that it is necessary.
If entries from these accounts have been used to compile your business records, then to that extent it may be reasonable for at least some of this information to be provided.
If HMRC believe that the income shown on your tax return is insufficient for you to live on, again this may be a reasonable request, but do ask them why they have requested the documents.
My business profits have been questioned and in particular my gross profit margin. What should I do?
You should provide any evidence you can, such as old price lists, wastage explanations or the effect of competition in the marketplace to explain the context and background to your figures. If there were unusual circumstances such as fire or flood damage, make sure HMRC know about this. If you were subject to theft by an employee, advise HMRC of any action taken, for example a report to the police.
Can an enquiry result in changes to my profit figures?
The HMRC officer has reworked various figures in my accounts that have resulted in a much higher profit figure. What can I do?
Only you will know the true figures for your business. You should consider whether the figures presented to you are in agreement with your recollection of funds being available to you from the business.
Stay calm and rework the figures yourself, if necessary.
Now that I have reviewed things, I think my profits may be significantly understated. What do I do now?
You should consider whether you need to take professional advice. If you decide to do this, make sure you let them deal with HMRC on all matters relating to the enquiry, although you should have input to any responses your advisers make on your behalf. Also if you claim tax credits, be aware that this may lead to an enquiry into any tax credits claim you might have made.
HMRC have suggested some round sum adjustments to my accounts. Overall the extra tax to pay would not be too bad. Are there any drawbacks to this approach?
There are a number of things you should bear in mind before you agree to any round sum adjustments:
- HMRC may seek to make similar adjustments to profits for earlier years
- If your turnover figure is increased, be careful in case this may also result in additional VAT becoming payable (if you are already VAT-registered) or result in you becoming liable to register for VAT (if this pushes your turnover to the level where you need to become VAT-registered)
- Any adjustments to your profits position may affect any claim you have made for tax credits
- Any additional tax due will attract interest and possibly penalties
Can I get help with the costs of the enquiry?
My enquiry has now finished. What about all the costs I have had to pay to let me answer the questions raised by HMRC?
You will not be able to claim reimbursement of any costs you have incurred for dealing with the enquiry from HMRC unless you can show that they acted outside their own code of practice or made a mistake. You may be able to claim the costs as a deduction in your own accounts, though as explained below.
In what circumstances can I claim the extra costs I have incurred for dealing with the enquiry as an expense in my accounts?
If at the end of the enquiry HMRC agree there is no additional tax due then all costs incurred in dealing with the enquiry can be claimed as an expense in your self-employed accounts and so tax relief can be obtained for them.
If at the end of the enquiry it is agreed that
- additional tax is due for the tax year to which the enquiry relates only, and
- the tax has been underdeclared due to a genuine mistake or a difference of opinion and not due to careless or deliberate behaviour
then all costs incurred in dealing with the enquiry can be claimed as an expense in your self-employed accounts and so can receive tax relief.
If at the end of the enquiry additional tax is due for more than one tax year then it is unlikely that the costs associated with the enquiry can be claimed as an expense in the accounts, particularly if the tax arises as a consequence of careless or deliberate behaviour.
Where can I find more information?
You can find more information in HMRC’s compliance checks factsheets on GOV.UK.