Be prepared as HMRC restarts tax investigations

HMRC is restarting its investigation processes after Covid-19, so should businesses tackle any issues?

HMRC is restarting tax investigations which had been paused while the Government department focused its energy on Covid-19 related measures. The latest research from UHY Hacker Young revealed that HMRC reopened over 100,000 compliance investigations in the first quarter of 2021, a 36 per cent increase from 75,000 compliance investigations in the last quarter of 2020. The number of current investigations has also quadrupled since the second quarter of 2020, the accountancy firm said.

While most companies will be subject to routine tax audits from time to time, a proportion could face HMRC tax investigations if there are inaccuracies in their tax returns. In the aftermath of Covid-19 business support measures and huge numbers of related fraud, HMRC is now stepping up efforts to look into wrongdoing.

According to HMRC, the following circumstances can trigger an investigation or compliance check:

• A customer enters incorrect figures on a tax return.
• A customer makes a large claim for a VAT refund despite low turnover.
• A customer declares a small amount of tax despite high turnover.
• A customer has unusually large costs which are unusual for a business in a certain industry.

We spoke to several accountants to find out what businesses need to know when it comes to tax investigations and how they can help support clients who may be concerned.

Encourage your client to make a full, unprompted disclosure

Claire Lea, Director, Prime Accountants Group

Businesses have been faced with extremely difficult decisions during the pandemic which required their own re-direction in resources so this may have resulted in errors and omissions being made.

However, it is not surprising if HMRC announces routine compliance checks to obtain evidence to back up furlough and other Covid-19 related claims as there has already been a suspected significant amount of fraud.

HMRC is also likely to target businesses where returns are consistently filed late or where there are substantial variations from previous returns, which can include large loss claims and cash refunds. Covid-19 may be the reason for the variances, so it is vital for businesses to retain accurate records to produce as evidence if requested to do so by HMRC.  

Next steps: For businesses who have underpaid tax, we would recommend making a full disclosure as soon as possible or amend the tax return if there is still time. Unprompted disclosures can result in lower penalties. Our advice is to contact their accountant to discuss the most appropriate method of disclosure.  A Time to Pay arrangement paid in instalments can also be applied for businesses struggling to pay tax.

Verdict: Accountants can support businesses in making a full unprompted disclosure to HMRC for a smaller penalty.

Not taking reasonable care with tax returns can lead to penalties

Paul Brown, head of tax, WR Partners and UK200 Group Tax panel member

HMRC is now ramping up enquiry activity as we return to ‘normal’. An obvious target is Covid-19 support payments.  HMRC are actively pursuing those who have made false claims, but they will also look at those who may have claimed legitimately but just got it wrong. Enquiries into Research and Development (R&D) tax relief claims for STEM companies are also becoming more frequent. 

Some HMRC enquiries will focus on a few points while others result in a full review of a business’s books and records and even the owners’ private affairs.  Historically, HMRC reviewed the taxes separately but increasingly they are reviewing all taxes together. 

Taking reasonable care in filing returns and just getting it wrong means HMRC recovers additional tax and interest but not penalties.  Not taking reasonable care will lead to penalties, the amount depending on the severity of the failure.

Next steps: If a taxpayer has concerns about their tax affairs, take control: assess and quantify the risk, mitigate it where you can and then disclose to HMRC before they ask you – if something has gone wrong the inspector is likely to be far more lenient if you come clean and not wait to be discovered.

Verdict: Not taking reasonable care with tax returns can lead to penalties.

Prepare a ‘defence package’ in the event of HMRC enquiry to demonstrate reasonable care

Stephanie Hurst, corporate tax manager, MHA Monahans

Covid-19 support schemes will be first on the agenda for the HMRC fraud department, especially furlough and the Self-Employed Income Support Scheme (SEISS). Since the start of the pandemic, specifically with furlough, reports suggest that £3.5bn of fraudulent activity has taken place. HMRC are keen to crack down on those businesses who have contributed towards this huge sum.

Later down the line, there could also be an increase in investigations into certain types of trading activities. During the pandemic, a lot of e-commerce businesses sprang up from nowhere, and I can imagine this surge of activity will have caught HMRC’s attention.

Next steps: There are several steps businesses can take in addressing material misstatement in business’s tax position due to fraud or innocent error:

• Own up straight away if there is unpaid tax, explain why the errors were made and repay the full amount as soon as possible.
• Have a secure ‘defence package’ in place in the event of an enquiry: review Covid-19 support calculations, consider your tax position to ensure accuracy and that any furlough claims are valid, to the best of your knowledge.
• It is important to comply fully with HMRC notices or enquiries.

Verdict: Prepare a ‘defence’ package in event of enquiry to show reasonable care has been taken with tax returns and financial statements.

Be prepared for HRMC challenge and report any errors to HMRC
John Cassidy, partner, Tax Resolutions, Crowe

HMRC’s recent ramping up of enforcement and investigations activity comes in the wake of the Treasury announcing £100 million worth of funding to HMRC to tackle fraudulent claims and errors, including a 1,250-person task force. Naturally, HMRC wants to recoup as much of that as possible to replenish the nation’s coffers.

By mid-June 2021, HMRC received over 28,000 reports from workers over potentially fraudulent claims and over 12,000 fraud investigations have been launched.

Key areas of focus will include VAT deferral, furlough scheme and the self-employed equivalent.

We have seen many examples of errors from not realising that dealing with emails while on furlough constitutes working, inadvertently claiming for employees who weren’t eligible or calculating the reference pay incorrectly. Innocent errors leading to overclaims are common.

Next steps: It is important that employers are prepared for any HMRC challenge and are confident no errors have been made or that errors are identified and reported to HMRC. Not coming forward is automatically deemed to be ‘deliberate and concealed’ behaviour, irrespective of the actual behaviour, meaning that a penalty of up to 100% of the repayable grant can be levied, effectively doubling the payment to HMRC.

Verdict: Be prepared for any HMRC challenge and ensure any errors made are reported to HMRC.

Annie Makoff is a freelance journalist and editor.