If HMRC’s Fraud Investigation Service has contacted you, you may be under investigation for serious tax issues. Experienced tax investigation specialists can help clarify your position.

The investigation will be under the following Codes of Practice (COP):

  • Code of Practice 8, which relates to bespoke tax avoidance schemes where investigation for tax fraud is not seen as necessary or appropriate
  • Code of Practice 9, where tax fraud or dishonesty is suspected and (usually) a large amount of tax is at stake

The investigation could relate to income tax, capital gains tax, VAT, SDLT, Inheritance tax or one or more of these, or any of the other taxes administered by HMRC.

Either way, HMRC have you firmly in their sights and you should not think that they can be fobbed off or avoided.

Even if you believe that HMRC are mistaken in their suspicion, and there is a simple or an honest explanation, it is essential that you deal with the investigation seriously and engage with HMRC even if only to deny any wrongdoing.

Ideally, you should appoint an experienced Tax Investigation Specialist to represent you with HMRC. This will ensure that you have someone to act as a buffer between you and HMRC throughout what can be a very worrying and anxiety-inducing experience. It will also ensure that you maximise your chances of resolving the investigation without serious consequences for you – such as prosecution, penalties for deliberate behaviour and publication of your name as a tax defaulter. Any information that you give your lawyer will also be subject to legal professional privilege.

What does HMRC look for during an investigation?

An HMRC investigation may be opened randomly within time limits simply to check from a fairly high level that the taxpayer‘s tax position appears to be correct. But a far more likely reason for an inquiry is that something about the tax return or tax computation has alerted HMRC’s computer that one or more claims for tax relief or an allowance or exemption may be worth checking to ensure that the correct amount of tax has been accounted for.

HMRC’s data gathering may also have indicated that income or gains have not been reported or that a business has been operating for a few years without filing tax returns and this latter reason is more common than you may think especially with cryptocurrency gains.

How can I prevent an Investigation?

Well in simple terms, you can avoid a tax investigation by filing tax returns on time, accounting for the tax due and by not relying on artificial or aggressive tax avoidance schemes. If you are doing something where reasonable views on the meaning and scope of a particular tax provision differ and you adopt an interpretation that HMRC are likely to disagree with then you should consider making a full written disclosure of what you have done to HMRC.

Making a full disclosure will have the effect of locking HMRC out from starting an investigation after the normal 12 month enquiry period has expired and so that the 4 and 6 year periods in which HMRC can raise what is called a “discovery assessment” will not apply. Of course making such a disclosure may prompt an investigation within the 12 month enquiry period.

Who is likely to get audited by HMRC?

Most obviously anyone using a tax scheme that has been disclosed by the promoter to HMRC under DOTAS (disclosure of tax avoidance scheme rules) and who should have been issued with a DOTAS reference number. Other examples include: (1) Anyone who has failed to account for tax or file tax returns including VAT returns when they were taxable and whom HMRC’s intelligence gathering systems tells HMRC that tax has not been accounted for; (2) Businesses that file a tax return which shows a significant break in the pattern of their regular revenue or expenses of claims for relief or exemption are likely to be asked to account for the reasons for this by HMRC; and (3) Executors and personal representatives who file IHT accounts that understate the value of the deceased’s assets and therefore pay insufficient IHT.

How do HMRC detect undeclared income?

HMRC detect undeclared income in a variety of ways. The most traditional method is to detect suppressed shop takings by doing test purchases and then examining the receipts and accounts of the business to see whether the sales have gone through the books for tax purposes. HMRC also apply standard profit margin ratios for different types of business and any business that routinely declares less profit on their declared turnover may be checked.

HMRC may also check a taxpayer’s social media presence to decide whether that person’s lifestyle and assets can possibly be supported by the level of income they are declaring for tax. If you are thinking of staying off HMRC’s radar then quiet luxury may be the name of the game!

Patrick Cannon is highly experienced in COP 8 and COP 9 HMRC investigations and in acting for clients in such investigations, including meeting HMRC investigators with clients.

Contact Patrick Cannon for an initial discussion or advice, if you are under HMRC specialist investigation.

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For professional and insurance reasons Patrick is unable to offer any advice until he has been formally instructed.