It can often be worrisome whenever a brown envelope lands on your doorstep, and even more so when it contains an enquiry letter. It is, however, important to take that first step into action to avoid what could be a simple compliance check snowballing into unnecessary penalties and interest.
An enquiry into a tax return can be random, but the vast majority are now targeted due to third-party data that HMRC receives. This includes sources such as bank data, crypto asset accounts, data leaks and open social media. HMRC received 9.5m disclosures from overseas tax authorities in the year to 31 December 2022, a huge increase of 48% from 2019.
The tax gap (the difference between the tax that should be paid, and which has been paid) stands at £39.8bn for the 22/23 tax year. In a time of high inflation where raising taxes is controversial, we can expect to see the government focussing their efforts on raising finance by closing this gap.
So, what are the first steps to take when you receive an enquiry, or a ‘nudge’ letter? When HMRC write to you it is important to run through a checklist before responding.
HMRC enquiry response checklist:
- What is the scope of the letter - a compliance check, a full enquiry or an aspect enquiry? Be sure to understand exactly what HMRC are asking for and consider what information HMRC may already hold. Has HMRC sent the letter in time, before the end of the enquiry window?
- Consult your adviser Enquiry work can often be time consuming for practitioners and fees can quickly escalate, so it is worthwhile checking whether you are covered by the firm’s fee protection cover. Our advisors have experience of many enquiries covering all aspects, and the skills to understand HMRC’s line of enquiry.
- Review your tax affairs It can be surprisingly easy to miss out some information when preparing your tax return, such as a new bank account, or misunderstanding the tax effect of selling an investment, for example. Foreign income you may hold and believe to be non-taxable may be incorrect.
- Dealing with controversial points HMRC may ask for your private records during an enquiry. Check that they are “reasonably required” and only provide information, which is relevant to the enquiry, blanking out irrelevant details.
- Dealing with “nudge letters” In recent years, HMRC have issued letters to taxpayers on a variety of subjects from the “Pandora Papers”, sources of foreign income and non-resident companies holding UK property. These are not formal enquiries, but inform the taxpayer that they have reason to believe that some form of income or gains have not been correctly disclosed. These letters should be treated in the same manner as an enquiry, and it would be advisable to review your tax returns and discuss with your advisor.
- Reaching settlement and penalties Hopefully the enquiry will not uncover any inaccuracies, but in the event you owe additional tax, HMRC will always consider charging penalties as well as interest. Penalties can range from 0% to 100% of the additional tax, depending on taxpayer behaviour, and whether or not the disclosure to HMRC has been prompted by them. Your actions during the course of the enquiry can greatly affect the outcome of the penalty amount. You can minimise the risk of penalties by engaging with a professional advisor upfront, and by cooperating with HMRC in a timely manner during an enquiry.
How we can help
To discuss the first steps to take when you receive an enquiry, or a ‘nudge’ letter from HMRC and the checklist you should run through before responding, please contact our tax dispute resolution team who will be happy to assist.
