Tax Investigations
FAQ - Clients
Inland Revenue investigations into personal or business tax returns
The following questions are some of the more often asked by those who are either under investigation by the Inland Revenue, or are concerned that such an investigation may happen.
Click on the questions below to be taken to the answer.
At the start of an Inland Revenue investigation
- > Why does HMRC start tax investigations?
- > If I am being investigated for a reason, does HMRC have to say what that reason is?
- > Is it true that my tax return could be investigated at random?
- > What sources of information are available to HMRC?
- > Does HMRC take informers seriously?
- > What does it mean if I don't receive a Code of Practice but am being investigated?
- > Can I be prosecuted for tax offences?
- > What length of prison sentence can be imposed for tax fraud?
- > I have been asked to have a disclosure report prepared on my behalf - is this a good idea?
- > How does having a disclosure report prepared improve my position?
During an Inland Revenue investigation
- > Do I have to go to meetings requested by HMRC?
- > What powers do HMRC officials have to obtain information from me?
- > What powers do HMRC officials have to obtain information from my accountant, my bank, or other third parties?
- > Can tax inspectors use their information powers overseas?
- > Can information be obtained by HMRC from overseas?
- > Are HMRC investigators allowed access to my home and/or business premises?
- > Can HMRC get a search warrant?
Towards the end of an Inland Revenue investigation
- > How does HMRC calculate tax penalties on previously undisclosed income or gains?
- > Do I have to sign a statement of assets or certificate of full disclosure?
- > Will I be given time to pay?
- > Can I pay by instalments?
General queries
- > Can I leave the UK to avoid paying what is owed to the taxman?
- > I left the UK owing back taxes. How can I sort this out with the taxman and return home?
Why does HMRC start tax investigations?
Although HMRC officials may deny this, most tax investigations are started because they suspect that a Tax Return or set of business accounts is incorrect. There are many reasons why such suspicions might arise. Here are some common reasons for investigations of businesses:
- > Information is received from elsewhere which does not tie in with the Tax Return or business accounts. Profits are lower than shown by similar businesses in the area. New funds are put into the business and it is not clear where they came from. The amounts taken out of the business appear insufficient to live on.
- > Unusually high business expenses arise, eg a large claim for motor expenses when there appears to be little business justification. Savings grew faster than the Inspector would expect from the declared profits of the business, or the amounts drawn from the company.
- > Sending in Tax Returns or accounts late.
- > Failing to tell HMRC when the business started and became liable to tax. Even though you will not be told the reason if a full enquiry is started, many cases will still be started for one or more of the above reasons.
If I am being investigated for a reason, does HMRC have to say what that reason is?
Under the previous system of investigations, yes, they had to give you or your agent a reason for starting the investigation (although there could also be other, perhaps more important, reasons which the inspector did not inform you of at the start of the investigation!). Under the current system of Self Assessment enquiries, no, they do not have to tell you. In fact, it is HMRC policy not to give reasons for starting Self Assessment enquiries.
Is it true that my tax return could be investigated at random?
Yes, a proportion of Tax Returns are investigated entirely at random each year, but these are relatively small in number In most cases, an enquiry will be started into a tax return following HMRC’s Risk Assessment process. It is HMRC policy not to tell you that you are being investigated at random. Where a random enquiry is made into a business Tax Return, it will be conducted in the exactly same way as any other full, in-depth investigation.
What sources of information are available to HMRC?
There are many sources of information available to HMRC. These include:
- > Informers, who often contact HMRC to pass on information about other people's financial affairs, eg an ex-wife, ex-lover or ex-employee who could have inside information about tax irregularities;
- > Banks and other financial institutions, which are required to disclose information about income arising on deposits and other investments;
- >Overseas tax authorities - a great deal of information is exchanged between HMRC and overseas authorities, particularly those in the EC and the USA (eg in the year to 31 March 2000, the Inland Revenue received 375,000 items of information from overseas tax authorities) (HMRC no longer publish this statistic);
- > Other Government Departments;
- > Local Authorities and other bodies which have information which may be relevant to income received or assets owned.
A large number of investigations begin each year as a direct result of information received by HMRC. Some of these are very large investigations and they lead to substantial amounts of extra tax liabilities.
Does HMRC take informers seriously?
Yes. However, tax inspectors are often sceptical about any such information received, particularly if it comes from an anonymous informer or if the information cannot be independently checked. Inspectors are aware that some informers are malicious. However, many large investigations start because an informer has given verifiable information about tax irregularities to HMRC.
What does it mean if I don't receive a Code of Practice but am being investigated?
This should not happen. You or your advisers should always ensure that one of the investigation Codes of Practice is issued by the tax inspector before you meet or give any information to HMRC. This is particularly important if the tax inspector is from Special Civil Investigations (SCI). If an inspector from SCI asks to meet you but does not issue Code of Practice 8 or 9, it is essential to find out why, because it is possible that they are looking for evidence which could be produced in court if it is decided to prosecute you. In such circumstances, it is essential that you seek specialist advice from someone who has broad experience of dealing with SCI.
Can I be prosecuted for tax offences?
Yes. If the offence is serious fraud and HMRC can find evidence to prove it in Court, they may decide not to follow civil proceedings. The number of prosecutions for tax offences each year is relatively small, but there has recently been an increasing emphasis on prosecuting people for false business accounts and tax returns. Prosecutions are now undertaken by the Revenue and Customs Prosecution Office (RCPO). The HMRC Website (link opens in a new window) has the current Criminal Investigation policy.
What length of prison sentence can be imposed for tax fraud?
It depends on the seriousness of the offence. Average jail sentences in recent tax prosecution cases have been around 1-2 years, but some far stiffer sentences have been imposed, eg:
- > An accountant was jailed for 3 years in April 1999 for falsely claiming repayments for some of his clients (£1m tax was at stake);
- >A restauranteur received 4 years for a tax fraud involving about £400,000;
- > A UK resident individual was sentenced to 7 years, and ordered to pay £3m, in June 1998 for a fraud which used offshore companies. His Jersey adviser was also jailed for 18 months.
When there is a successful prosecution, HMRC will often seek a confiscation order. If the amount imposed under the order is not paid, additional time will be added to the custodial sentence.
I have been asked to have a disclosure report prepared on my behalf - is this a good idea?
Generally, yes. HMRC will usually only suggest this in a major investigation, particularly one conducted by Special Civil Investigations (SCI) or the Civil Investigation of Fraud (CIF) teams. It is standard practice to suggest that such a report is commissioned in all Code of Practice 9 investigations. Your advisers might also recommend that a report is prepared in other investigations. This may be the right way to proceed but caution must be exercised if you do not have the protection of Code of Practice 9 – any report submitted without this protection may be used as evidence if HMRC decides to prosecute.
How does having a disclosure report prepared improve my position?
Firstly, it can be a good way of shortening the length of the investigation. It can also be instrumental in defining which areas are of most concern to the investigating inspector. An experienced adviser can agree with the inspector which areas should be reviewed, concentrating the efforts made to satisfy the inspector that everything relevant is being disclosed. A good report, prepared by an adviser who has prepared many such reports, will present the client's position in the best way possible, paving the way for negotiating a satisfactory settlement to the investigation.
Do I have to go to meetings requested by HMRC?
No. You are not obliged to attend a meeting with the inspector, and this is confirmed in the relevant HMRC Codes of Practice.
What powers do HMRC officials have to obtain information from me?
The Taxes Acts say that, for the purpose of enquiring into a Tax Return, a HMRC officer may require the taxpayer to produce such documents as are in the taxpayer's possession or power, and which may reasonably be required to determine whether the Return is incorrect or incomplete. If you do not possess the documents required, and it is not in your power to obtain them, you cannot be required to produce them. Note that, in certain circumstances, it can be a criminal offence to destroy documents which may be required by HMRC in an investigation. In criminal investigations, HMRC may obtain a search warrant to enter your home and business premises to obtain information.
What powers do HMRC officials have to obtain information from my accountant, my bank, or other third parties?
HMRC has a specific power to oblige third parties to produce documents which are in their possession or power and which, "in the inspector's reasonable opinion", may contain information relevant to the tax liabilities under investigation. Normally this is used by tax inspectors to obtain information about a specific person under investigation, but inspectors also have the power to obtain information about more than one person without naming them, eg all the clients of an accountancy practice. Any third party who might have relevant documents can be approached in this way, but there are some limits on these powers where the documents are legally privileged and in the case of certain medical records and other documents. In potential prosecution cases, third parties may be raided and their premises searched if HMRC obtains search warrants. parties.
Can tax inspectors use their information powers overseas?
No. Their powers are neither valid nor enforceable outside the UK, and cannot be used in offshore jurisdictions like the Channel Islands and the Isle of Man. However, in certain circumstances, they may ask foreign tax authorities to exercise their own powers locally to obtain information relevant to a UK tax investigation. Tax inspectors have also been known to politely ask for information from third parties in foreign jurisdictions, even though their formal powers could not be used. Inspectors are often surprised (and pleased!) by the amount of information which is volunteered, in a spirit of co-operation, in such circumstances.
Can information be obtained by HMRC from overseas?
Yes. Substantial amounts of information regularly pass between the UK and overseas tax authorities, particularly those in Europe and North America. During the year ended 31 March 2000, for example, 375,000 items of information were exchanged in this way (this statistic is no longer published). Often such information is exchanged spontaneously but specific requests can and are made. Information obtained from overseas tax authorities plays an important part in some major investigations and leads to substantial additional tax liabilities.
Are HMRC investigators allowed access to my home and/or business premises?
Most HMRC investigators do not normally have the power to enter premises, except by invitation, during the course of an investigation. PAYE auditors and NIC investigators do have some rights of access to business premises to check wages and other records. In serious fraud cases, where a prosecution is being pursued, search warrants may be obtained.
Can HMRC get a search warrant?
Yes, but only in the most serious fraud cases where a prosecution is being contemplated. Search operations must be authorised by the Board of HMRC, and warrants can only be issued by the appropriate judicial authority (a Circuit judge in England and Wales, a sheriff in Scotland, or a county court judge in Northern Ireland). If tax officials arrive with a valid search warrant, they have a legal right to enter the premises, and seize and remove anything which may be needed as evidence in criminal proceedings. They can also search people on the premises, but searches must be conducted by persons of the same sex. They must not be obstructed in their duties. Legal and specialist advice should immediately be sought in such circumstances.
How does HMRC calculate tax penalties on previously undisclosed income or gains?
The maximum penalty which can be charged is equal to the amount of any additional tax which becomes payable as a result of a tax offence. The theoretical maximum of 100% is reduced taking into account all the circumstances of the investigation, in particular the following factors:
- > Disclosure - if a full disclosure of all tax irregularities is made on challenge, the penalty percentage is reduced by 20%. If disclosure is made completely voluntarily, without fear of challenge, an additional 10% reduction can be earned.
- > Co-operation - if the person under investigation fully co-operates with the enquiries, the maximum reduction in penalties which can be earned is 40%.
- > Seriousness - depending on the gravity of the tax offence, the amount of undisclosed income or gains, and the number of years involved, up to 40% reduction can be given.
By taking the right approach and following best advice, a considerable reduction in the penalties payable can be obtained. If you wish to discuss what penalties might arise in particular circumstances, please contact us.
Do I have to sign a statement of assets or certificate of full disclosure?
No. There is no obligation under the Taxes Acts to do so. However, it is generally advisable to do so, in the appropriate circumstances, providing that you are certain that everything relevant to your tax liabilities has been disclosed to HMRC. You should not be asked for either of these, unless additional income or gains have come to light. If you refused to complete such a statement or certificate, the investigating inspector may conclude that you have something else to hide, or may seek additional penalties for "poor co-operation". Beware: if you knowingly sign an incorrect statement or certificate, there is a very high risk that you could be prosecuted.
Will I be given time to pay?
The minimum time to pay is usually 30 days from the date of HMRC’s letter accepting your offer in settlement (most investigations and enquiries are concluded by an exchange of letters between you and the inspector). It may be possible to extend this by negotiation but this may lead to additional interest charges. In some circumstances, it may be possible to pay by instalments (see next question).
Can I pay by instalments?
Only if HMRC is satisfied that you cannot raise the money to meet the debt in any other way. The Revenue's leaflet IR160 says:
"If you agree the amount to be paid, but cannot pay the full amount straight away, it may be possible to arrange payments by instalments. We will expect you to make as large a down payment as you can and to pay the rest, including an amount for extra interest, by agreed instalments over as short a period as possible. We will suggest you pay by direct debit."
In practice, most instalment arrangements are paid over at least two years and not more than five years. HMRC are taking a tougher approach on agreeing instalment arrangements, and you should discuss with your adviser at an early stage in the enquiry if means is going to be a problem.
Can I leave the UK to avoid paying what is owed to the taxman?
There is no simple answer to this question. Whilst there are legitimate tax planning opportunities that involve going non-resident, permanently leaving the UK during a tax investigation is generally inadvisable. Co-operation between the UK and other tax authorities is increasing all the time. There have been instances of HMRC obtaining the extradition of individuals. We strongly recommend taking specific advice on all the issues, not just tax, if you are considering leaving the UK for tax reasons.
I left the UK owing back taxes. How can I sort this out with the taxman and return home?
It is always possible to enter into negotiations with the taxman to settle back taxes. However, care needs to be taken to ensure that such negotiations start on the right foot and that any possible risk of a criminal prosecution is ruled out. In some circumstances, the initial negotiations may be carried out on an anonymous basis. How such negotiations start depends on the exact nature of the problem, and specific advice should be taken before contact is made with the taxman. At Tenon Tax, we have considerable experience of conducting such negotiations on behalf of clients and reaching satisfactory solutions to such problems. We would be happy to discuss this further if you contact us. An initial discussion on the circumstances and how we could help will be free of charge.