HM Revenue and Customs (HMRC) is increasing the number and scope of tax investigations into both individuals and businesses, covering all aspects of potential underpayments of tax, including offshore investments, personal and corporate Self-Assessment Tax Returns, PAYE and NIC compliance and VAT.
This increased enquiry focus was already evident prior to the COVID-19 pandemic. The pressure on government to raise funds to recover the significant sums deployed will only increase this.
In the past, an individual inspector reviewing tax returns – or through random selection – would trigger most enquiries. However, HMRC now has many tools to risk assess taxpayers, and random selections are rare. Data analytics processes, information provided by financial institutions and tip offs from third parties are increasingly used to flag returns that merit a second look. It is quite likely that if HMRC opens an enquiry, they believe an error may have been made.
Our insurance broker engaged a local firm of advisors for their routine accounting and tax compliance needs. After restructuring the business, HMRC raised an enquiry into the process and challenged the value of capital gains that had been calculated by the directors. If HMRC were successful in their challenge, the directors would face a £1m tax bill. After 18 months of enquiry, the advisors had not been able to move the case forward.
An insurance specialist in our Tax Investigations team picked up the case and re-presented the arguments to HMRC to support both the commercial aspects of the transaction and the basis of valuing the business. After two letters to the inspector and a conference call, HMRC accepted that the returns were correct, and the £1m potential tax liability was dismissed.