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What to expect during an HMRC compliance check

carolineheath 27 March 2019 No comments

HMRC have recently updated their factsheet CC/FS1a About compliance checks to include more detail on what information they might request during a compliance check.  In this blog article we remind businesses of what to expect during an HMRC compliance check and how they can help make the process run as smoothly as possible.

What is a compliance check?

HMRC conduct compliance checks to make sure a business is:

  • paying the right amount of tax at the right time, and
  • getting the right allowances and tax reliefs.

What does the compliance check involve?

When HMRC start a check, they will notify the business of what information or tax issues they want to review.

During the check HMRC may:

  • request the business sends them any information or documents they require
  • request a meeting to discuss the business’ tax affairs and records
  • ask to visit the business to inspect the premises, assets and records.

If the business does not agree to send the information or documents requested, or allow HMRC to visit the business premises, then HMRC can use their legal powers to obtain what they need.

Further information on HMRC’s legal powers and a business’ safeguards when HMRC use their legal powers can be found in the following factsheets:

Use of open source material

During a compliance check HMRC may observe, monitor, record and retain internet data which is available to anyone. This is known as ‘open source’ material and includes news reports, internet sites, Companies House and Land registry records, blogs and social networking sites where no privacy settings have been applied.

The benefits of assisting HMRC with compliance checks

It is usually in a business’ best interests to help HMRC with their compliance checks. This will generally:

  • result in a better relationship with the tax authority
  • enable HMRC to complete the check as quickly as possible and minimise the inconvenience caused to the business
  • reduce the amount of any penalty charged (if applicable).

What if HMRC find an error?

If HMRC find something wrong, the business will need to put it right and HMRC should work with the business to achieve this. HMRC will also notify the business if any of the following are payable:

  • additional tax and late payment interest
  • penalties.

Penalties

If HMRC are considering charging a penalty, they look at how much assistance has been given by the business during the check. This assistance is referred to as ‘quality of disclosure’, or ‘telling, helping and giving’.

The quality of disclosure is measured by considering how much:

  • the business tells HMRC about what’s wrong
  • help the business gives HMRC to work out what’s wrong
  • access the business gives to the information or documents HMRC need to complete the check.

If a business chooses not to assist HMRC with the compliance check, this will affect HMRC’s view on the quality of disclosure.

How to get the maximum penalty reduction

If HMRC find an error and the business does everything possible to assist them, it will usually benefit from the maximum possible penalty reduction.

If a business knows or suspects that there’s a tax error, to get the maximum reduction possible, the business must:

  • tell HMRC about it immediately
  • work with HMRC to calculate the right amount of tax.

If HMRC find a tax error the business did not know about, to get the maximum reduction possible, the business must:

  • have given HMRC as much assistance as needed, up to the point they find it
  • immediately tell the officer dealing with the check everything about it, let them see any records they ask for, and help them to work out the right amount of tax.

To work out the quality of disclosure, HMRC also consider how long it has taken the business to tell them about the error. If it’s taken a long time, 3 years or more, HMRC usually restrict the maximum reduction to 10 percentage points above the minimum of the penalty range. This means the business will not benefit from the lowest penalty percentage that’s normally available.

For further information on the penalties relating to tax errors see factsheet CC/FS7a Compliance checks: penalties for inaccuracies in returns or documents.

What happens at the end of a compliance check?

Once a compliance check is completed, HMRC will either send the business one or more ‘decision notices’ or agree a contract settlement with the business.

A decision notice can be:

  • an assessment, or amendment to an assessment
  • a penalty notice, if a penalty is due
  • a letter explaining the final position.

A contract settlement is a legally binding agreement, where the business offers to pay everything that is owed as a result of the check, and HMRC agree not to use their formal powers to recover that amount. A business can only pay through a contract settlement if both parties agree to this, and to the terms of the contract. Contract settlements are not used for VAT errors or VAT penalties.

Even if HMRC do not find any errors during a compliance check, it is good practice to ensure the business obtains for its records a letter from HMRC confirming that the check has concluded and that no errors were found, or issues identified.

What to do if the business disagrees with HMRC’s findings

If the business does not agree with any of HMRC’s findings, it is advisable to write and notify HMRC and explain why.

If HMRC make a decision that can be appealed against, they will write to the business about the decision and advise what to do if the business disagrees with it. The business usually has 3 options in these circumstances.

Within 30 days, the business can:

  • send new information to the officer dealing with the check and ask them to take it into account
  • write to request the case be reviewed by an HMRC officer who has not been involved in the matter
  • arrange for an independent tribunal to hear the business’ appeal and decide the matter.

Whichever option is chosen, the business may also be able to ask for an HMRC specialist officer to act as a neutral facilitator to help resolve the dispute. This is known as Alternative Dispute Resolution (ADR). ADR is only available for disputes that relate to particular tax areas. The officer dealing with the check will tell the business if ADR is available for the dispute.  Please see our previous blog article on ADR for further information.

Authorising a representative

If the business has a representative that deals with its tax matters, it can ask HMRC to deal directly with them during the check.

If a business wishes to authorise a professional tax adviser to deal with HMRC on their behalf, then the business should complete form 64-8 : Authorising your agent and send it to HMRC.

How we can help

Please get in touch if you would like assistance with or advice following an HMRC VAT compliance check.  We can also act as your authorised representative with HMRC on VAT matters.