HMRC Investigations into Personal Tax Returns
Most tax investigations carried out by HMRC are into tax returns submitted by individuals.
Some of these investigations will be cases where HMRC suspects that some income such as interest, dividends, rental income or capital gains, have been omitted or understated on the tax return.
Many of the cases will be into the tax returns of people who are self-employed. In these cases, HMRC believe that the taxpayer has a greater opportunity to understate the taxable profits earned by the business operated by the taxpayer. This could be through either understating or omitting their income or overstating their expenses.
Often when a company tax investigation is undertaken by HMRC they will also want to review the personal tax affairs of the directors of the company, particularly where the company has few directors or is a family run company. However, an investigation into a company’s tax affairs does not automatically give HMRC powers to obtain personal information from the directors of that company.
Tax investigations are often divided into two categories: “aspect” enquiries and “full” enquiries; in the legislation there is no difference between the two categories. Broadly speaking, the “aspect” enquiries are cases where HMRC is asking about particular entries on the tax return. On the other hand, “full” enquiries look at every aspect of the tax return.
Investigations into tax returns where there is no business involved
HMRC can obtain information about bank interest and dividends received by individuals. This can be checked against the tax returns to see if all the interest and dividends have been properly declared. If there appears to be a discrepancy between the expected figures and the figures on the tax return then HMRC will want to know why there is a difference.
Capital gains tax arises on the sale of assets, though some are exempt (for example, the main home and small gains with low sale proceeds). If HMRC believe that a capital gain has been omitted from a tax return they will open an investigation.
These types of tax investigations are usually comparatively straightforward, in that the information is usually easy to obtain and check, but there are occasions where there are complications. For example, someone owning a buy-to-let property could have incurred considerable expense in carrying out refurbishment or structural work on the property but not kept receipts to provide evidence of the expenditure; in such a case HMRC will resist allowing a deduction for the expenditure when the gain is calculated and therefore alternative ways of justifying the claim will be required.
WLH Tax has assisted a number of clients who have not retained receipts to evidence expenditure that would be allowable to reduce profits or gains. We are able to put forward innovative arguments to ensure that you do not pay too much tax.
Investigations into tax returns where there is a business involved
When HMRC open a full tax investigation into a tax return when there is a business involved, they will usually ask to see all the business records and some personal financial records (such as private bank accounts). This will include any financial accounts prepared, either by the taxpayer or their accountant. HMRC will examine these records in detail to see if all the income and expenses have been correctly reported and claimed.
HMRC will usually want to meet with the taxpayer face-to-face so that they can get an understanding of the way in which the business operates. WLH Tax recommends that taxpayers do not attend a meeting with HMRC unrepresented and that ideally the meeting should take place without the taxpayer being present.
Where HMRC establish there are errors with a taxpayer’s affairs and additional tax is due, they are able to collect tax in earlier years if the same error arose. In some circumstances HMRC can go back up to 20 years.
How can WLH Tax Help
HMRC has various powers granted to them to assist them in carrying out a tax investigation. There are also limits to these powers. WLH Tax is a specialist tax investigation practice and so we are aware of the limits to HMRC’s powers and know when it is appropriate to challenge the way in which HMRC is conducting the investigation. In particular, where there is a company tax investigation, we will not allow HMRC to extend their investigation into the personal tax affairs of the director unless they have established a very good reason for this.
WLH Tax will discuss with you and with HMRC any apparent discrepancies between the accounts and the records with a view to reaching an agreement with HMRC. We will also negotiate any additions to profits which might be required, and will put forward arguments to minimise your tax liability and the penalty charged.
If HMRC have opened an enquiry into your personal tax affairs then please contact us for a free, confidential and no obligation discussion. We are happy to have an initial free of charge meeting with prospective clients.