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When considering HMRC investigations, always ensure that the relevant time limits have been met.
In any HMRC tax investigation, the time limits must be observed by HMRC.
In income tax, HMRC can open a civil enquiry into a tax return if notice is given to the taxpayer within the time limit. The time limit allowed is in section 9A(2) Taxes Management Act 1970, and is basically 12 months from when the return was filed, if that occurred on or before the filing date (the 31st January following the end of the tax year on 5 April).
The notice of enquiry must be received by the taxpayer before the end of the enquiry period. HMRC allows 4 working days by 2nd class post and 2 working days by 1st class post for the notice to reach the taxpayer. HMRC will have to cancel an enquiry if notice is issued less than 4 working days before the end of the enquiry period, and they cannot show that it was sent by 1st class post.
If the notice was sent late and HMRC had to cancel it, the enquiry will be treated as settled by agreement between the taxpayer and HMRC.
With a tax assessment, on the other hand, it is the date of issue of the tax assessment that counts, and not the date that it reaches the taxpayer.
HMRC’s tax investigation process and investigation into the return can vary widely. Examples include:
HMRC cannot open a section 9A enquiry once the 12-month time limit has passed. However, that does not mean it cannot look at your tax affairs once the 12-month limit has expired. If HMRC can show that a loss of tax has been brought about carelessly or deliberately (i.e. dishonestly) by the taxpayer or his agent, then it can issue a “discovery assessment” for the missing tax using the powers in section 29 Taxes Management Act 1970.
The rules governing the issue of discovery assessments are complicated, but basically, HMRC normally has four years from the end of the tax year concerned to issue a discovery assessment, but this is extended to six years where the taxpayer has been careless, and 20 years if they have been dishonest.
HMRC uses the information gathering powers in Schedule 36, Finance Act 2008 to support an investigation. The important point to note is that Schedule 36 contains no effective time limits on how far back HMRC can request information.
Because Schedule 36, FA 2008 does not lay down effective time limits, the courts and tribunals have developed a principle that, before HMRC can force a taxpayer to hand over information that is more than four years old, HMRC must show that there is an arguable case that the entries on the tax return were either careless (up to 6 years then allowed) or dishonest (up to 20 years then allowed). See Hegarty  UKFTT 774 (TC)and Brannigan  EWHC 885 (Admin) quoted in Hegarty.
In other words, HMRC cannot go on fishing expeditions if they suspect that the correct amount of tax may not have been paid more than four years ago.
In order for the taxpayer to be required to supply the information requested, HMRC must first show that there is a reasonable chance of being able to issue a discovery assessment for that tax within the time limits allowed. For example, if there has not been any dishonesty, they would not be able to issue an assessment going back more than six years anyway, so there is no point in requiring the taxpayer to provide such information. Taxpayers should firmly resist any such fishing expeditions and be prepared to issue judicial review proceedings if necessary.
This depends on a number of factors including how many questions HMRC are seeking answers to, the detail and complexity of the factual and legal issues involved, the speed or otherwise with which the taxpayer and the HMRC investigator deal with the correspondence and whether there are matters that have to be referred for legal advisers on either side for further advice.
It is not unusual for tax investigations to last more than 12 months, and sometimes 5 or more years – especially where tax avoidance schemes are involved. What seems clear is that tax investigations seem to be taking longer, as HMRC become more aggressive in their approach and tend to assume the worst – particularly when it comes to assessing penalties that may be due for any previous underpayment of tax.
This can be for a number of possible reasons that include suspected omission of income, over claimed deductions, your business is of a type that is being targeted by HMRC for compliance checks, or a risk assessment has thrown up possible cash (undeclared) receipts or undeclared drawings, high expense claims or late filing of tax returns and payment of tax. HMRC’s guidance is published here.
If you are suspected of committing fraud, HMRC will make a thorough investigation into your affairs, including your financial conduct around the time you are thought to have committed tax fraud. This will come about due to suspected irregularities in your tax affairs and will need to be investigated before a decision is made as to whether fraud has actually taken place.
During the tax fraud investigation process you might be issued with a Code of Practice 9 (or COP 9 for short). This gives you the opportunity to disclose deliberate and non-deliberate financial misconduct that may have led to the irregularity in question. Read on here to find out more about this option and what it entails.
If you have received an enquiry or investigation from HMRC, contact Patrick Cannon today to get advice and representation against HMRC.