When the brown envelope from HMRC lands on the doormat, most people don’t need to read the letter in great detail to know that there are difficult times ahead; guilty or innocent HMRC are going to give you a hard time. Here are some tips on how to deal with a tax investigation.

Whilst we talk about a Tax Investigation HMRC use soft words instead such as enquiry, review or check. Regardless of the language they all mean you are being investigated by HMRC.

So what are the key things to do (or not to do).

Don’t Panic

For many here will be an initial knee jerk reaction such as fear, denial and anger or a desire to have a chat with the Inspector to show you are a good person and willing to help or to assure HMRC there is nothing wrong.

This is a time for cool heads, planning and contemplation as to what could be the problems and taking stock of the situation. Do not do anything rash and:

Take Expert Advice

Your fist discussion may be with your accountant. Some are good at tax investigation work, many are not specialists. Engaging a specialist can make all the difference in time taken to deal with the issues and the eventual outcome. You must have an open and honest conversation about what may or may not have gone on and sometimes this is difficult with existing advisors.

An expert in the field of tax investigations understands the legal frame work in which HMRC operates and the subtleties of tax investigations which can be used to your advantage. After all you would not ask a GP to conduct specialised surgery.

Don’t Lie

Tell your advisor the truth, if you have chosen well then they will be able to manage the situation properly. If there is something wrong then it is best this is disclosed to HMRC at the earliest given opportunity.

HMRC Already Knows Quite A Lot

HMRC rarely go on “fishing expeditions”. Before any tax investigation they review your tax returns and research their “data warehouse” for background information on property and other assets, interest bearing bank accounts and now they have access to various information from G8 countries including overseas property. Often they will have sufficient evidence to suspect that there are problems with your tax affairs. If you do not tell them and they have to tell you then the costs of sorting the matter out goes up significantly.

Think Critically

Think about what has gone wrong (if it has) and how it has happened. Before sending anything to HMRC or make sure you it has been looked at and consider if anything needs explanation.

Make sure if any bank statements are sent to HMRC that any none business deposits are explained.

Prepare For Meetings

If you do attend a meeting make sure you are prepared. Anticipate any questions (this is where an experience advisor really helps) and think about your answers. Never attend without an advisor and ensure you take notes of what was said. Meetings are not just about finding more about the business, they are designed to catch you out.

Question What HMRC Are Asking For

HMRC often ask for things that they are not entitled to or send out onerous requests. Ask them why they need the information and think about what it has to do with your tax affairs. If the answer is it is nothing to do with your tax return then it is unlikely that it should be provided.

Deadline Management

HMRC Officers are under tremendous internal pressure to keep Investigations flowing. They will often suggest deadlines for the provision of information and responses. Often these are unreasonable. If you think they are entitled to the information then think about how long it will take you to do as they ask. Then tell them how long you think it will take to do.

Remember where there are delays HMRC have unavoidable delays due to pressure of work, you are not cooperating!

Make Payments On Account

If you do owe tax then (if you have the funds) you should make payments on account to HMRC.

This demonstrates cooperation with HMRC and stops the clock of further interest accruing from the date the payment is made on the amount of the payment.

Find Solutions

At certain points in a tax investigation there will be questions to which no one knows the answer or technical ‘grey’ areas where the answer is unclear. Make pragmatic suggestions to HMRC as to how these could be resolved

Mitigate Penalties/Name and Shame

Penalties are based on perceived behaviour so make sure you understand how these work and read HMRC’s own guidance on this. Ensure that all answers to questions support the behaviour that you think has happened and that the penalty mitigation factors have all been covered. The difference between disclosing problems and helping sort them out, or denying them can reduce penalties by a massive margin. Behaviour during the enquiry can also have an influence on whether you appear on the quarterly name and shame list of “tax cheats” or not. Make sure you are not.

Don’t Do It Again!

HMRC do not look favourably on second time offenders and at best they will charge you a high penalty and these are always looked at more seriously for prosecution. Tax investigations are such a traumatic experience that most people never want to experience them again.