Handling HMRC enquiries: tips for success

15 May 2024

Taxpayers and advisers may have a wide variety of experiences dealing with HMRC during investigations. Every investigation is different, so there are often explanations for many of the disparities. For example, HMRC is naturally much more likely to put greater resource (and therefore greater pressure on the taxpayer) into high value disputes at house level affecting multiple entities and individuals than more simple cases relating only to individual fund managers.

However, trends emerge in practice, and we explore below three areas where taxpayers can benefit from having a focused approach and consistent strategy.

  • Understanding HMRC’s powers and the limits on those powers.
  • Knowing what rights taxpayers have and what steps they can take at each stage in the process.
  • The implications of taxpayer behaviour and co-operation.
Understanding HMRC’s powers

The first step in navigating any enquiry is to understand who is actually opening, running and making the decisions with respect to it, what their motivations are, and what constraints might apply to them.

How is HMRC organised?

HMRC is not a monolithic body, but a large and complex organisation and is rarely transparent about what is going on in the background to an enquiry. However, an understanding of who is making the decisions and how they are made is vital in navigating the enquiry and reaching a satisfactory resolution. Key to this is establishing who you are dealing with and (more importantly) who you should be dealing with.

In outline, there are 11 “Groups” within HMRC, which are then divided into multiple “directorates” which, in turn, comprise multiple teams and sub-teams.

On enquiries, the key players are the following.

  • The Customer Compliance Group (CCG): this Group is mostly operational in nature. The officers sitting within it are those who carry out the day-to-day work of tax administration, such as conducting enquiries and issuing assessments. Someone from CCG is likely to be the main contact during an enquiry.
  • The Customer Strategy and Tax Design Group (CS&TD): the purpose of CS&TD is to develop and deliver policy reforms to the UK tax system. Most relevant to private equity taxpayers is likely to be the Asset Managers and Collectives team that sits within the Business, Assets and International (BAI) directorate, and provides policy and technical oversight across this area.
  • Solicitor’s Office and Legal Services (SOLS): it is not unusual for legal advice to be sought from one of the advisory teams on particular issues during an enquiry, and SOLS are also likely to be consulted in relation to a significant settlement.

Referrals to CS&TD and SOLS during an enquiry are frequently the cause of delays.

How are decisions relating to opening enquiries made?

HMRC takes a risk-based approach to opening enquiries – there are certain criteria HMRC is on the look-out for or it may be provided with intelligence from a third-party. However, HMRC also operate a “random enquiry programme” which selects a sample of returns for enquiry before there is any consideration of risk. This is done to inform the risk criteria for future cases.

In a private equity context, it is also worth noting that an enquiry opened into a partnership automatically deems that enquiries are opened into all the partners of that partnership. Equally, if HMRC discovers something during an enquiry into one partner, it is likely they will want to assure themselves that the same issue has not affected all other partners and they will, therefore, frequently open enquiries into the partnership and other partners (or issue discovery assessments if otherwise out of time).

Who is responsible for running an enquiry?

Once the enquiry is opened, the first move from HMRC will be to seek information. These information requests will initially be made informally, but HMRC has wide powers to require information if it is not provided voluntarily. It should also be noted that HMRC does not need to open an enquiry to ask for or require information if it has reason to suspect a loss of tax.

In a complex or high-value investigation the officer who is the face of the investigation does not alone make whatever decisions they please. In a private equity context, it will often be the case that the Asset Management and Collectives team is working behind the scenes and guiding the decisions that are made. This can cause delays in enquiries as the team has oversight of a large number of cases, and it can take them time to respond to the enquiry officer (this can also be the case when SOLS are involved). In practice, this can result in inconsistencies between cases when a matter is not referred to a policy team, like Asset Management, as it should be – which can, of course, work to a taxpayer’s advantage or disadvantage.

How are enquiries resolved?

It should not be surprising that investigations are often closed with no tax payable. It is legitimate for HMRC to check a taxpayer’s tax position and, if they are satisfied it is correct, the investigation will end. 

Where that is not the case, the most desirable outcome on both sides is typically reaching a settlement rather than incurring the time and costs associated with litigation.

HMRC cannot settle a case by simply “splitting the difference”. This means that HMRC can only agree to terms that they consider reflect the correct tax treatment. This may sound like there is little scope for negotiation, but where cases have a range of alternative approaches and are not “all or nothing” disputes, a settlement that works for both parties is possible.

There are also several governance boards for dealing with more complex tax disputes, which aim to help with consistency and deal with cases in a fair and just manner. A significant settlement will need to be approved by a governance board and, in addition, if an issue that is being enquired into affects multiple taxpayers, there will usually be a “handling strategy” in place that has been determined by an “issues board” which sets out an agreed approach that cases are to be determined in line with. The enquiry officer will not be able to resolve enquiries in a manner that falls outside the handling strategy without the matter being escalated.

Knowing taxpayer rights

So, the taxpayer has received questions from HMRC – what happens next?

Taxpayers have certain rights and obligations and HMRC is also subject to certain limitations in the exercise of its powers. Understanding these from the start will help with the smooth running of an investigation and ensure that the taxpayer is not on the back foot.

The first step is to determine the nature of the communication from HMRC. Does it notify the taxpayer that HMRC is opening an enquiry? Does it specify the issue that is being investigated? Is HMRC making an assessment outside of any enquiry that calls for tax to be paid (a so-called discovery assessment)? Or is it simply an informal request for information?

To be valid, formal notices from HMRC, whether enquiry opening notices or discovery assessments, must meet certain criteria, principally that they are issued within the applicable time limits and are capable of being understood by a reasonable person in the position of the taxpayer as having their intended effect (e.g. giving notice of an intention to open or close an enquiry).

For an individual or a partnership, an enquiry must be opened within one year of the tax return being filed. As the name suggests, an enquiry signals a process under which HMRC will collect information and reach a conclusion as to whether a taxpayer’s filing position is correct or not. HMRC can issue information requests outside of an enquiry but they must have some suspicion that tax has not been paid.

Where HMRC only becomes aware of what they consider to be unpaid tax after the enquiry window has closed, they are able to issue discovery assessments. The time limits relating to discovery assessments are more complex and they differ depending on matters such as the behaviour of the taxpayer (was the loss of tax caused by careless or deliberate behaviour?) and whether an offshore matter or offshore transfer is involved. Although a discovery assessment will call for a particular sum of tax to be paid, HMRC may well still be considering the matter and there is usually scope to provide information and discuss matters further.

Assuming they are valid, the taxpayer has the right to appeal both discovery assessments and also formal (known as Schedule 36) information notices. Exercising those rights can be a critical step, and an appeal must be made within a short time period – only thirty days. In the case of a discovery assessment, an appeal is essential because, otherwise, the matter will be final and there will be no opportunity to discuss any other alternative. In the case of an information notice during an enquiry, no decision to assess has been made and so it is the scope of the enquiry that is being challenged. So, an appeal can buy more time to respond and, crucially, it also represents a route to limit the scope to what is being sought.

Enquiries, and often discovery assessments, represent the start of an investigation that can continue for a long time. Taxpayers also have a right to appeal closure notices, but as the name suggests, those will only be issued once an investigation is complete. They are, therefore, the first step towards formal litigation.

A particular point for a taxpayer to understand from the outset, when responding to information requests, is their right to withhold any documents that are protected by privilege, or to waive that privilege. For example, communications between taxpayer and lawyer for the purpose of obtaining legal advice are privileged. More generally, the taxpayer only has to provide information that is reasonably required to check their tax position, so HMRC cannot go on a fishing expedition or make unduly onerous requests for information. This is important because HMRC will typically cast their information notices very widely at the start.

Implications of co-operating

Although there can be significant delays in enquiries, usually taxpayers and HMRC are aligned in wanting to resolve them as quickly and efficiently as possible. An exception to this may be where both parties are waiting for the outcome of a relevant live case whose facts are analogous. A collaborative and co-operative approach should be sought as far as possible with HMRC to give the taxpayer the best chance of progressing the matter in a manner that works for them as well. In the event that an investigation results in additional tax being paid, taxpayer behaviour during the investigation can be important when it comes to assessing possible penalties.

Co-operation does not, however, mean conceding to everything that HMRC asks for. Even when information is reasonably required (which will not always be the case), HMRC’s requests are often extensive and time-consuming to comply with. Once the information has been provided it will usually lead HMRC to seek further information on particular issues. There is, therefore, a benefit to working with HMRC to try and narrow requests, and the best opportunity for this is before formal requests are issued.

Taxpayers should also be wary of HMRC forcing a rushed timeline that does not allow the individual or business to gather the relevant information, taking into account the resources available to it and the nature of the information sought. If the taxpayer has been working collaboratively with HMRC, they will have a better chance of agreeing a timeline that is workable.

If, nonetheless, HMRC issues a formal Schedule 36 notice that is overly broad and requests a large amount of information that is either irrelevant or unreasonable to obtain, it is important to appeal the notice (and, ideally, propose an alternative, more reasonable information disclosure). No matter what is said, taxpayers are entitled to challenge notices that are overly broad, and failure to appeal and limit the scope of the notice to what is reasonably required could result in penalties running until HMRC is satisfied that the exact scope of the original request has been met. This could take a significant amount of time and could result in the taxpayer having to focus on gathering information that is not relevant and, as a result, unnecessarily, which will ultimately prevent them from progressing the investigation process.

Every investigation is different, but by understanding how HMRC operates and what rights and steps are available, taxpayers should be able to formulate a strategy that progresses the process as efficiently as possible to the desired outcome.

If you would like to discuss any of the points raised in this note, please get in touch with Sarah Ling or Sophie Rhind.