HMRC’s powers enable it to check whether your tax returns are correct. HMRC uses the term ‘compliance check’ to cover all types of enquiries, investigations and visits to business’s premises.

What are the main types of compliance check?

Tax return enquiry

For individuals and trustees, the most common type of compliance check is an enquiry focusing on a specific tax return. This is opened within 12 months of the return’s submission, unless it was submitted late. HMRC requests information and documents to enable it to check any aspect of the return (including the original cost of assets sold) and to ensure the return is complete. When it completes its enquiries, HMRC usually issues an ‘enquiry closure notice’ to either confirm that the tax return requires no amendments or to amend it.

Discovery assessments

In other cases HMRC may use its powers to obtain information and documents before issuing ‘discovery’ assessments to collect income tax or capital gains tax (CGT) for past years.

Code of Practice (COP) investigations

In some cases HMRC’s Fraud Investigations Service may open Code of Practice (COP) 8 or 9 investigations.

COP9 is used for cases of suspected fraud or deliberate errors.

COP8 tends to be used for cases where fraud is not suspected so the problem is more likely to be a technical issue, for example whether someone needs to pay tax in the UK. Both these investigations can be lengthy and may end in civil (rather than criminal) settlements.

For a COP9, HMRC only allows 60 days for an individual to decide how to respond: admit deliberate errors and disclose what went wrong; or deny fraud. The risk is that failing to tell HMRC of deliberate errors or failures may result in prosecution, so getting advice from a specialist tax advisor quickly after receiving HMRC’s opening letter is essential.

If you face a criminal investigation then you need a specialist solicitor’s help immediately.

Seven tips for dealing with compliance checks

The following tips will help you to deal with enquiries or civil investigations into income tax or capital gains tax.

1. Seek professional advice  quickly from an advisor who specialises in dealing with the type of enquiry or investigation that you face
2. Provide HMRC with the relevant information and documents quickly, as delays may increase penalties if they are due
3. Anticipate HMRC’s next question and answer it now – providing explanations often shortens the enquiry process
4. Be ready to explain what went wrong if there is an issue with your tax return – HMRC needs to know in order to decide if a penalty is due. Penalties can be up to 300% of the tax and may result in publishing of your details, although careless error penalties may be suspended
5. Making a payment on account of tax due will mitigate late payment interest charges
6. If you disagree with HMRC’s decisions, closure notices or assessments, then get help to appeal them within 30 days of the date they were issued
7. If you will struggle to pay what you owe and you need time to pay, ask now – don’t wait for HMRC to use bailiffs, insolvency powers, etc.

Helen Adams TEP is Tax Principal at BDO LLP in London, UK