HMRC Enquiries - Fee Insurance
In the age of Self-Assessment, HMRC rely on the taxpayer to declare and pay the correct amount of tax. HMRC is entitled to enquire into taxpayers’ returns to check this and, where there is non-compliance, any underpaid tax becomes payable together with interest and penalties where relevant.
Tax avoidance regularly hits the headlines, giving increasing public support to the government’s drive to crackdown on those not paying their ‘fair share’.
The government monitors the ‘tax gap’ which is the difference between the amount of tax that should, in theory, be paid to HMRC and what is actually paid. For the 2017/18 tax year, the tax gap was £35 billion, equivalent to 5.6% of tax liabilities. Most of the gap is created by small businesses and individuals failing to pay the right amount of Income Tax, National Insurance Contributions and Capital Gains Tax.
Enquiry procedures are a key part of HMRC’s toolkit in reducing the tax gap and ensuring tax compliance. The selection process for enquiries is based on risk. The higher the perceived risk of non-compliance, the more likely a taxpayer will be selected for enquiry.
The risk factors are wide ranging. It may be that a taxpayer falls within a specific category, perhaps defined by income sources or income levels, which is identified as being at high risk of underpaying tax. It may be a tax return reports a significant transaction which is unusual for that taxpayer, such as a substantial capital gain or a large Capital Allowances claim. Or it may be that a taxpayer is selected, unfortunately, purely at random.
HMRC use a sophisticated computer-software program, Connect, which analyses information from a variety of sources including banks and building societies and government agencies, such as the Land Registry, and cross references these to tax returns. If there are gaps between what HMRC expects to see on the tax return and what is reported, then an enquiry is likely to be opened.
At Evolution ABS we consider the risks of enquiry into each tax return that we prepare. Where we consider it sensible to do so, we will recommend making a disclosure on the tax return to pre-empt certain queries HMRC may have. For example, including an explanation of a significant transaction within the return can minimize the risk of HMRC opening an enquiry.
Whilst we seek to conclude HMRC enquiries robustly and as swiftly as possible, they can be lengthy and highly detailed, consuming significant amounts of time and therefore professional fees. At Evolution ABS we offer our clients fee protection insurance which covers our fees for responding to HMRC and defending the client’s position in the event of an enquiry, saving costs and providing peace of mind.
With HMRC’s increasing capabilities, fee protection insurance is more important than ever.
The content of this article is for general information only and does not constitute tax advice. It should not be relied upon and action which could affect your business should not be taken without appropriate professional advice.
Victoria Paley ACA CTA
Senior Tax Manager
Victoria joined the practice in July 2019 having worked in accountancy and tax in the rural sector since 2010. As a Chartered Accountant and Chartered Tax Adviser Victoria spends most of her time advising family farming businesses on Capital Gains Tax and Inheritance Tax matters primarily in relation to succession planning and capital transactions.