06/05/2014

By Neil Tipping, Wolters Kluwer’s CCH tax expert

It is six years since HMRC received new penalty powers for inaccuracies in returns. These penalties range from zero for innocent error, all the way up to 200% of the tax due for deliberate understatement with concealment of an overseas source of income. You can reduce these penalties simply by fully co-operating with the enquiry. However, that co-operation must involve your (or your accountant’s) active co-operation in resolving the officer’s questions. In short, you must disclose any errors you are aware of at the earliest opportunity and actively assist the officer to quantify those errors.

This is a major sea change for HMRC because it essentially rewards those taxpayers who collaborate to resolve enquiries at an early stage.

But it does not end there. The penalty phase of an enquiry is preceded by the review phase. All returns are analysed by HMRC’s risk assessment and intelligence teams (RIAT) before being selected for an enquiry. This means that a return is selected because it has raised one or more flags on their system. To be sure, HMRC will assess the level of risk and may raise a light-touch intervention, whereby a letter goes to the taxpayer stating that they notice that (for example) your employer’s return shows you had a company car last year, but it does not appear to be on your personal tax return – all the way up to a request for all books and records. This is to ensure that the response from HMRC to a perceived risk is proportionate rather than, as used to be the case, a one-size-fits-all full investigation.

What happens if you don’t do anything?
If you ignore requests from HMRC you are likely to be fined £300 and issued with a penalty notice, which is charged at £60 per day of non-compliance.

The legislation is stacked firmly in favour of HMRC, so unless you have very deep pockets, it is unwise to take an unnecessarily adversarial approach. That being said, it is not always necessary to roll over when HMRC ask for information that you would clearly not progress the enquiry. The short answer is to ensure that you seek professional advice at an early stage from an advisor who knows and understands how enquiries work and, more importantly, knows the taxpayer’s rights.

Collaboration is the way HMRC is now seeking to deal with all enquiries. The new single compliance process usually means that the officer is obliged to give at least broad indications of his or her concerns, which can be a major time-saver, but only if the taxpayer and his or her agent are willing to meet the officer half-way. In the absence of co-operation, HMRC carries a big stick and is not against using it.