HMRC Compliance Check

Income Tax | PAYE | VAT

Get it right the very first time and get help if you have a local compliance check by HMRC. If there are discrepancies, it may be the start of a tax investigation.

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HMRC Compliance Check


Compliance checks are not viewed as a criminal inquiry but instead an investigation into any potential wrongdoing or attempt to hide false information declared as true. In the case of individuals, the checks are most often used to establish whether a person has underpaid their taxes; these can be part of a simple routine checking procedure. Individual local compliance investigations occur when HMRC is alerted to a possible problem. Due to the powerful nature of the HMRC’s database, information is gathered on most aspects of a person’s financial dealings. The database can be triggered in instances regarding your income reports, declaration of assets, amount of bank interest received, your capital gains or other matters relating to your tax reports. A local compliance investigation can also be undertaken if it is believed that your income source is something other than what was declared on your returns.

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HMRC employs a risk-based approach to identify businesses that may be evading their tax payments. If you’ve been chosen for a compliance check, HMRC has most likely detected a greater degree of risk based on one or more of the following factors:

  • It’s common for accounts and tax returns to differ from year to year, but it’s less common for profits to drop or expenses to skyrocket. There may be a positive explanation for this, such as the pandemic’s unprecedented impact on numerous sectors, but it could also be a sign of inaccurate accounting records and a lack of compliance.
  • A late tax return will result in a late payment fine. If it’s a one-off, you may not hear from HMRC again. A compliance check may be initiated if you regularly submit your tax returns late or make payments beyond the deadline.
  • If you make errors on your tax returns on a regular basis, HMRC’s all-seeing eyes will begin to scrutinise your business. Preventing errors may be as simple as paying more attention to your returns or consulting with an accountant.
  • It’s very uncommon for a business owner to employ his or her spouse and give them a salary to work for the business, but they must work! HMRC may start to investigate them if they’re getting paid well yet their PAYE records indicate that they’re working full-time elsewhere.
  • If a third party informs HMRC that you aren’t paying the taxes you should, it may initiate a compliance check to investigate further. Ex-spouses and old business colleagues are frequent sources of information.

HMRC sends you an information notice as the first stage in the process. It will notify you that a compliance examination of your company’s tax affairs is being conducted. It will ask you to submit certain information and documents within 40 days after receiving the notification. If you are unable to reply by the deadline, you must contact HMRC to inform them of your situation.

Before responding to the information notification, you should consult with a tax adviser who has expertise in compliance investigations. They’ll be able to assist you in gathering the information you need and responding to HMRC demands for further information. If you don’t reply, you’ll be issued a formal information notice, which may result in a fine of £300 plus a daily fine of up to £60 until you respond.

If HMRC is dissatisfied with the information it receives and wishes to investigate your tax situation further, HMRC officers may pay you a visit to your premises.

The vast number of visits are notified, with at least seven days’ notice in writing, through inspection notice, or over the phone with written confirmation. The inspectors may examine everything from business tax returns and accounting to PAYE, VAT, and NICs. The written authorisation must include a list of the documents that the officers are authorised to examine.

HMRC may also consider that an unannounced visit is the best method to conduct an inspection. They will give you notice of inspection and a brochure (pdf), as well as their identification. If the notice was signed by an authorised official, you have the right to refuse HMRC officers entrance. If, on the other hand, the notice has been authorised by an independent tribunal and you prevent access, you may face a £300 fine and a fine of up to £60 per day until you allow HMRC to conduct the inspection.

You will not be penalised if you have a reasonable explanation for not allowing HMRC to conduct an inspection, such as if your accountant or tax adviser is not present.

Modern-day accounting firms have become aware that without having business analysts and advisory services, options to increase client base is very limited. Business, on the other hand, do not want to hire a third party business advisory service to look at financial savings and improve profitability. It would work both ways. As Tax Accountants, our job is more extensive as every penny saved will save you more in tax.

Taxpayers have a set of rights that may enable them not to comply with an HMRC inspection but to defend themselves. Included are:
  • The right to be represented – A taxpayer may hire an accountant, a tax consultant or even a friend on their behalf or in connection with this procedure.
  • The right to consult a specialist – taxpayers have reasonable time to consult a professional before answering the HMRC.
  • The right to confidentiality – your personal engagement with HMRC shall be discreet.
  • The right to complain – If taxpayers think they have not been fairly treated by the HMRC, they have the right to complain
Although you don’t have to cooperate with the demands of HMRC or assist with your tax investigations, it is in your best interest. This will be considered, and penalties may be reduced. You must not be charged any penalty if you have a reasonable explanation for not allowing HMRC to conduct an inspection, as is the case if your accountant or tax adviser is not here.
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