Should your business be preparing for a tax investigation?

Business Leader recently spoke with Dominic Bourquin, Head of Tax at MHA Monahans Group LLP, to discuss the impact the pandemic has had on tax investigations, and how the firm can help your business navigate the challenges they could face.

What impact has Covid-19 had on tax investigations over the last 18 months?

At the start of the pandemic, HMRC made the executive decision to place a significant majority of tax investigations on pause, at least for the first lockdown, citing a lack of capacity as the key reason for doing so. Instead, HMRC’s teams focused resources on implementing various support packages, such as the Coronavirus Job Retention Scheme (CJRS), the Self-Employed Income Support Scheme (SEISS) and Bounce Back Loans (BBLs) to counter the effects of the pandemic. However, as the country now emerges back into greener pastures and support schemes end, HMRC is once again reinstating its investigations.

While the support schemes acted as a lifeline for so many businesses through the pandemic, there’s no denying they are a double-edged sword. They were incredibly tricky to navigate and administer, and now they’re being used as ammunition by HMRC.

Anyone who has taken out any type of coronavirus support in the last 18 months will undoubtedly receive detailed questions from HMRC into how they implemented those schemes either in standalone form or as part of a wider HMRC review of their affairs. It’s likely we’ll see reams of cases where accidental errors were made as leaders grappled with the new rules, and others may be investigated by HMRC who may have nothing to show at the end of their enquiries. Of course, we will also see further cases of fraud from those companies, businesses and individuals who wrongly took advantage of the schemes.

Can you explain the process of a tax investigation from HMRC?

This is not a straight forward question, as HMRC’s investigation processes can range from what we would call a “nudge letter” – a letter effectively saying ‘are you sure your affairs are up to date and you don’t have anything to tell us’ – to full scale, all aspect enquires which ask for a huge amount of information.

Whatever sort of communication an individual or business receives from HMRC, I would urge them to contact a professional.  HMRC’s communication may seem like an innocent query to answer, but it may not be as harmless as it first appears.

HMRC is only entitled to information reasonably required to assess a taxpayer’s return (i.e. not a wish list or fishing expedition) and it must issue its enquiries within strict time limits.  HMRC, in some cases, has a habit of asking for information it is not entitled to. For example: it is investigating one spouse and it asks for the bank statements of the other spouse. It may also make requests once the strict time limits have passed, in which case there is no requirement to respond.

If HMRC is asking you questions about your affairs or those of your business, tread with caution and engage a professional.

At what point does HMRC get involved in launching a full investigation?

There’s no one-size-fits-all approach to investigations or other types of HMRC intervention. Sometimes HMRC may decide to attack sectors that appear to be vulnerable; sectors where there’s a lot of cash transactions are usually at high risk. Or it may be that, through its computer systems, HMRC notices an irregularity that needs explaining.

The UK shares information with over 100 countries across the world, so irregularities on international property, for example, could also be flagged up for investigation.

The “nudge letters” mentioned above are particularly effective. HMRC issues thousands of letters and needs only a small number of taxpayers to profess to having a tax irregularity (resulting in additional tax, interest, and penalties) to make the letters a very worthwhile exercise.

That said, so called “random checks” are these days much more unusual. If HMRC does launch a formal enquiry, it is very often because it believes it has already found an irregularity. HMRC’s computer system, called Connect, accesses DVLA and border control information, airline flight information, credit card information, personal investments, and bank statements so your movements and larger transactions can be monitored. HMRC knows about (or can find out about) all your investments, business dealings, holidays, vehicles and large, personal purchases – all of which could lead to investigation if there are irregularities.

If you or your business is found to be involved in transactions where the dots don’t quite join up, HMRC will more than likely enquire into your affairs. Again, at that stage, it is well worth engaging a professional to assist you.

Has the pandemic increased the risk of an investigation?

I don’t think it has increased the risk of it necessarily, but if you have fraudulently claimed support under any of the coronavirus support measures, then you’ll easily be found out.

HMRC will continue its usual enquiry pattern and it will be asking you to justify what you’ve claimed, why you’ve claimed it and scrutinising the calculations to make sure they are correct.

The pandemic support measures provide HMRC with another opportunity to examine your affairs, as part of other more wide-ranging enquiries.

Once you receive a notification from HMRC, what steps should a business take?

Firstly, engage a professional to assist you.  There will then be a process of assessing whether the inquiry is valid and requested within the relevant time limits, making sure that HMRC is only asking for information it is entitled to.  HMRC is also required to state the risk it is trying to cover off with its enquiry – for example, there are occasions where HMRC has got the wrong person and it’s better to establish that first than half-way through a costly investigation.

Once established that it is a valid enquiry notice, individuals and businesses should engage with HMRC to help it understand your/your business’s tax affairs.  However, that engagement must be careful, cautious and measured to ensure that the scope of HMRC’s enquiries and interventions are within the boundaries of what HMRC is allowed to request and that time limits are not breached.

How can MHA Monahans help?

At MHA Monahans, we have a specialist tax investigation service which, for a small fee, provides a service that can be used during any tax investigation launched in the 12-month period covered by the service. If you or your business is ever investigated by HMRC, then the fees that we incur to deal with that enquiry on your behalf are covered by your one off, annual, service fee.

Why would someone choose Monahans over anyone else for this service?

We provide a bespoke, specialist service using specifically trained staff who only work in this very niche area of tax. If you are dealing with HMRC, then you need a professional who can provide an excellent service with extensive knowledge. As a business, you need the accountancy firm you’re dealing with to have a wealth of experience and vast resource to keep HMRC in line – and we can offer that.

Our team will save your business time and money and ensure you don’t need to pay any unwarranted tax penalties.

Following the end of the furlough scheme, would you advise businesses to speak to Monahans about potential tax investigation services?

It’s crucial that individuals and businesses engage with us about our tax investigation services, as the likelihood of investigation is high and rising, particularly given the level of coronavirus support claimed and the Government’s desire to reduce debt by raising more revenue. And when the taxman investigates, it’s disruptive, lengthy and can be incredibly stress-inducing. Our service takes a huge weight from your shoulders and allows you to maintain peace of mind.

To learn more about MHA Monahans’ Tax Investigation Service, visit the website here: http://monahans.clientweb.site/