As a business owner, you'll be aware that you must pay certain taxes to HMRC each year. The tax system in the UK requires businesses to pay capital gains tax, income tax, and corporation tax.
However, some businesses have unpaid taxes or purposely mislead on their company tax return. When there is unpaid tax, or a tax return looks dodgy, HMRC steps in.
In this article, you'll learn all about tax affairs concerning an HMRC compliance check and what you need if you receive an HMRC compliance letter.
What is an HMRC compliance check?
An HMRC compliance check, also known as a tax enquiry, is an assessment to check whether a company or self-employed individual is meeting its tax obligations.
A fault is usually found in a tax return or other significant financial document, and then a letter is sent out for a compliance check.
An investigation begins if a company or individual is not paying, is overpaying, or is simply checking that the tax system is fair. The investigation is thorough, with HMRC checking payments, documents, and accounts to identify if compliance has been upheld or withheld.
HMRC compliance checks determine:
- Tax fraud: compliance checks help to detect and discourage tax evasion
- Paying the right amount: to ensure you're paying the right amount of tax at the right time, check for over- or underpaid tax
- Correct tax reliefs: your business may be entitled to allowances and tax reliefs, and compliance checks will ensure you're getting the correct ones to benefit your business
- Check the tax system: HMRC conducts compliance checks to ensure the tax system operates fairly
- Suspicious activity: investigate avoidance schemes or suspected tax evasion.
HMRC sometimes conducts random compliance checks, so if you receive a compliance check letter, it doesn't necessarily mean the investigation is for tax evasion.
If you're sure you've filled your self-assessment tax return to the best of your knowledge, you shouldn't have much to worry about. You must provide the correct information to help the investigation move along smoothly.
Why HMRC carries out compliance checks
Businesses or individuals have to participate in a compliance check for different reasons, and it's not always incriminating.
Although checks can be random, some things can trigger an HMRC compliance check.
For example:
- Wrong data: when filling out your tax returns, sometimes mistakes happen, and figures don't add up how they're supposed to. So, there could be an error or mistake that needs clearing up.
- Large claims: if a business's turnover is low, but there are significant claims for VAT refunds, this may flag up with HMRC
- Small tax declaration: a business with a high turnover but only declares a small tax amount may trigger a compliance check
To avoid compliance issues, fill out your tax returns with the correct information, pay all the necessary taxes, and file all the required information on time.
What to so if you receive an HMRC compliance check letter?
If HMRC plans to run a compliance check, you will receive a letter explaining what it needs to check.
If you have an accountant, they will receive a written letter on your behalf. Once the letter is received, you have roughly 40 days before the check begins. The letter will request your information and tell you what you must provide.
The following steps will talk you through what you need to do if you receive a compliance check letter from HMRC:
- Seek help: to ensure you're handling the situation appropriately, you may choose to seek professional advice. If you have an accountant they will be the best person to talk to about the compliance check.
- Gather required information: once you've got the advice necessary for the compliance check, you must gather all the required documents. Only provide the requested information to save both your and HMRC's time.
- Send the information: you'll have 40 days to send the required information and documents to HMRC. If you fail to provide the requested information, HMRC will issue a formal information notice that could result in a fine.
- Pay your taxes: if you still need to fulfil your tax responsibilities, you must pay your bill immediately once you've supplied the information to HMRC. Be transparent with HMRC, and with good reason, you may agree to a solution that suits both parties.
- Meet with HMRC: you may be asked to meet with an HMRC compliance officer to discuss your situation. These meetings aren't compulsory, but it could be helpful in your situation to consult your tax records and affairs.
- Pay penalties: if you're found to be non-compliant, you must pay penalty charges. However, if you cooperate, you can reduce the penalty if something is wrong with the information you provide.
A compliance caseworker conducts the investigation, and it's their job to find out facts to make lawful and impartial decisions about the right amount of tax collection. A compliance officer oversees the investigation and works in the best interest of both parties.
What information will you need?
Each investigation will be a unique case. However, there are general documents that are usually asked for, such as company tax returns, PAYE records, accounts, and calculations, and any other essential documents that disclose the handling of business money and taxes.
The letter you receive will specify what you will need to send, and usually, there is a strict time limit of 40 days from receiving the letter to send the relevant information back.
What are the outcomes of a compliance check?
The investigation will end if the check proves nothing untoward is happening with your taxes. There will be no further investigation once you’re informed of the positive outcome.
If it appears you've overpaid any taxes, then you will receive a tax return with any interest due added. You may be advised on how to pay the right amount of tax in the future so you do not overpay again.
If the investigation determines that you've underpaid taxes, you must repay the correct amount alongside charged interest and potential penalties. If fraudulent activity is detected during the investigation, HMRC will deal with it accordingly and may conduct a criminal investigation.
Regarding penalties, how cooperative you were during the process will determine if HMRC will reduce the amount. The more you help, the more it will work in your favour.
If you disagree with the outcome of the compliance check, you can apply for an Alternative Dispute Resolution. If you're appealing against the decision, HMRC will write to you again and give you the following options:
- Send new information: you must provide any evidence, further information or documentation to the compliance officer dealing with your case for them to review
- Case reviewing: you can contact a separate officer and have your case reviewed by someone without involvement for a second decision
- Independent tribunal: the third option is to arrange an independent tribunal where you will deliver your appeal and share the case
If you are determined to fight the result, you must do so within 30 days of making the decision.
Final thoughts
If you're worried about receiving a compliance check letter, the best thing you can do is file your taxes to the best of your ability, and if you're afraid you've under or overpaid, you can reach out to HMRC for help and guidance. You can contact HMRC to discuss any tax enquiries.
If you've already received a compliance check letter, you should ask quickly as there is no point in putting it off. If you've knowingly not paid any taxes, you should make amendments as soon as possible.
