Compliance checks on the increase
The self-assessment system essentially relies on the taxpayer’s honesty to ensure that all tax that is due is paid. However, as a back-up, HMRC carries out compliance checks on a proportion of returns to ensure that the correct amount of tax has been paid. Its opening paragraph in its guidance advises:
“HM Revenue & Customs (HMRC) has a responsibility to ensure that individuals and businesses are paying the correct amount of tax or claiming the right amount of any HMRC benefits, for example tax credits. HMRC needs to make sure that everyone meets their responsibilities, so they carry out compliance checks – sometimes referred to as enquiries, investigations, inspections or assurance visits.”
Despite its name, a compliance check is a formal HMRC tax investigation. In commencing a compliance check, as per the guidance above, HMRC will be checking various matters, for example a tax relief claimed on the return is correctly claimed, or they have a particular reason to suspect that tax has been underpaid.
Compliance checks are on the increase due to the improved (and continuing improvement) information technology resource (known as Connect) available to HMRC, enabling analysis of the data they receive from third parties – for example, banks are required to provide to HMRC details of the accounts held by an individual and HMRC has ready access to property sales via the Lands Registry. HMRC are also able to cross check returns against other filed tax returns, for example employment details including employment benefits, against the returns filed by the employer.
A check can cost the taxpayer in both monetary and time costs, as well as distress. For example, one of our clients had a check opened recently into their 2017 return. The basis of the check was whether the tax paid on the sale of their business was correct due to the entrepreneurs’ relief (10% tax relief) claimed. This was a significant, life changing disposal for the client who, as part of their decision to sell their business, had factored in a 10% tax charge. The client received the compliance check notification letter setting out a number of questions regarding the sale, which we dealt with promptly with a call to the HMRC officer dealing with the check and thereafter a written response (which, due to the seniority of the officer involved, we were able to deal with via email to speed up the process) setting out replies to the queries. Our reply resulted in the officer requesting supporting information to the replies provided, which involved providing the contract of sale and a number of other contacts for assets acquired historically by the business, the costs of which had be deducted in calculating the taxable charge. On the review of these contracts, HMRC concluded the entrepreneurs’ relief claim was valid, and the tax charge correct. The client therefore did not have to pay any further tax, interest or penalties. However, there were our fees for dealing with and managing the check, which we dealt with in less than two months. The saving grace for the client was they had purchased tax investigations fee insurance which covered all our costs.
This compares to another client who was referred to us, picked for a compliance check for failure to notify interest received on a bank account on their 2017 return, HMRC having receiving details from the bank direct. This check is now in its 8th month, as HMRC have decided to look at other aspects of the 2017 return, outside of the bank interest point.
With the increase in the risk of a compliance check, our best advice is that consideration be given to taking out tax investigations fee insurance if a policy is not already in place, for example via membership of a professional organisation like The FSB, or via a legal expenses insurance policy.
We can arrange cover with Professional Fee Protection Limited, details of which are provided on the linked factsheet.