The HMRC compliance checks are an important part of the UK tax system. Every year, the HMRC carries out a number of random checks to ensure that businesses and individuals are paying the correct amount of tax. If you are selected for a compliance check, it is important to cooperate with the HMRC.
This means providing all of the required documentation and answering any questions truthfully. However, you should also be aware of your rights. The HMRC must follow certain procedures when carrying out a compliance check, and you have the right to appeal if you believe that you have been treated unfairly.
Compliance checks can be stressful, but by understanding the process and knowing your rights, you can help to make sure that the experience is as smooth as possible
What is an HMRC Compliance Check?
An HMRC compliance check is an in-depth examination of an individual’s or business’s tax affairs. HMRC may undertake a compliance check to verify that an individual or business has correctly declared their income and paid the correct amount of tax. The process usually involves sending a questionnaire to the taxpayer, followed by a meeting to discuss the answers. Compliance checks can be both routine and targeted, depending on the level of risk HMRC perceives.
For example, businesses with complex financial affairs or those who have been involved in recent tax avoidance schemes may be subject to more intensive scrutiny. Ultimately, the goal of an HMRC compliance check is to ensure that everyone is paying the right amount of tax. This helps to create a level playing field and ensures that vital public services are adequately funded.
What Can Trigger an HMRC Compliance Check?
Most people are aware that the role of the UK tax authority, HMRC, has the power to conduct checks on individual taxpayers and businesses to ensure that they are complying with their tax obligations. But what actually triggers a compliance check? In most cases, it is simply a matter of HMRC selecting a taxpayer at random for routine monitoring.
However, there are certain circumstances that can increase the chances of being selected for a compliance check. For example, if HMRC receives a tip-off about possible tax evasion, they may launch an investigation.
Additionally, discrepancies between the information declared on a tax return and information from other sources (such as employer records) can also trigger an HMRC compliance check. So if you want to avoid unwanted attention from the taxman, it’s important to make sure that your tax affairs are in order.
Your returns fluctuate significantly from year to year
HMRC has a complicated system for identifying which businesses to audit for compliance with tax law. They consider many factors, but some of the primary ones are listed above. If your business is selected for an audit, it means that HMRC has determined that your company presents a higher risk than others. This could be based on any number of things, from the amount of money you make to the number of employees you have. Whatever the reason, it’s important to be prepared for an HMRC audit and to cooperate fully. By doing so, you can avoid any potential penalties or fines that may be imposed.
Your tax returns are often late
Filing your tax return late will result in a fine, and if you make a habit of it, you may trigger a compliance check from HMRC. A compliance check is an in-depth review of your tax affairs, and can be a stressful and time-consuming process. It’s important to stay on top of your tax affairs, and to file your return and make payments on time. If you do find yourself in a situation where you cannot meet a deadline, it’s important to contact HMRC as soon as possible to explain the situation and try to arrange a payment plan. Waiting until after the deadline has passed will only make the situation worse.
You don’t take care when completing your returns
If you’re self-employed, then you’re responsible for filing your own tax return. And if you make mistakes on your return, it’s only a matter of time before HMRC takes notice. So what can you do to avoid mistakes? First, double-check your figures and make sure everything is correct. If you’re unsure about anything, seek professional help from an accountant. Second, take care when filling out your return. Take your time and double-check everything before you submit it. Finally, keep good records of your income and expenses so that you can easily find the information you need when it comes time to file your return. By taking these simple steps, you can help to prevent mistakes on your tax return and avoid unwanted attention from HMRC.
You employ your spouse on overly favourable terms
owning your own business comes with a lot of perks. One of them is the ability to hire your spouse and pay them a salary for their work. While this can be a great arrangement, it’s important to make sure that your spouse is actually doing work for the business. If they’re being paid a handsome salary but PAYE records show that they’re employed full-time elsewhere, HMRC may start to ask questions. To avoid any potential problems, make sure that your spouse is actually doing some work for the business and that their salary is commensurate with the work they’re doing.
You’ve been reported by someone you know
It’s important to make sure you’re paying the right amount of tax. If HMRC (the UK tax authority) thinks you might be underpaying, it may launch a compliance check. This usually happens after someone has tipped them off, for example an old business partner or ex-spouse. During a compliance check, HMRC will look at your records and financial situation to make sure you’re paying the correct amount of tax. If they think you owe money, they may ask you to pay it back, with interest and penalties. If you’re not sure how much tax you should be paying, it’s worth getting professional advice. That way, you can be confident you’re meeting your obligations – and avoid any unexpected bills from HMRC.
What Happens During an HMRC Compliance Check?
HMRC will then conduct an in-depth review of the taxpayer’s records and may request additional information or meetings as needed. If HMRC finds that the taxpayer has not complied with tax regulations, they may impose penalties or interest charges. In severe cases, His Majesties Revenue and Customers may refer the case to criminal investigators.
Information notice
The first step of the process is being sent an information notice by HMRC. It will inform you that a compliance check is being carried out into your business’s tax affairs. It will request that you send certain information and documents, usually within 40 days of the notice being issued. If you are unable to respond by the deadline, you should contact HMRC to let them know.
Before you even begin to gather the necessary information and documentation, you may want to consider seeking the assistance of a tax advisor with experience in dealing with these types of requests. They will be able to help you navigate the process and avoid any potential pitfalls. Of course, there is always the possibility that you may fail to respond to an information notice from HMRC. If this happens, you could be subject to a fine of £300 and daily fines of up to £60 until the information is received. In other words, it pays to be prepared when dealing with HMRC compliance checks.
Announced and unannounced visits
Sometimes the HMRC (Her Majesty’s Revenue and Customs) may not be satisfied with the information they receive about your business. In these cases, HMRC officers may pay you a visit to your business premises in order to investigate further. This can be a daunting experience, but there are some things you can do to prepare for it.
First, make sure that you have all of your paperwork in order, including your most recent tax return. It’s also a good idea to have a basic understanding of HMRC’s powers and what they are allowed to do during an inspection. Lastly, remember that you have the right to remain silent and seek professional advice if you feel like you’re being unfairly treated. If you take these steps, you’ll be in a better position to deal with an HMRC inspection
If HMRC suspects that a business isn’t paying the right amount of tax, it may launch an investigation. The vast majority of these investigations are announced, with notice given at least seven days in advance. The notice will take the form of a written confirmation, either in the form of a ‘notice of inspection’ or over the phone. The documents that the HMRC officer is authorised to inspect must be listed in this confirmation.
Typically, they will include company tax returns and accounts, PAYE records, VAT records and NICs (National Insurance Contribution) records. The officers conducting the investigation are usually experienced HMRC staff who will have a good understanding of how businesses operate. They will use this knowledge to look for any discrepancies between the paperwork and what they would expect to see. If they find any evidence of irregularities, they will then launch a full-scale enquiry.
Being visited by HMRC can be a nerve-wracking experience, especially if the visit is unannounced. However, it is important to remember that HMRC is simply doing its job in ensuring that businesses are complying with the law. An unannounced visit from HMRC may be the best way to carry out an inspection, as it allows them to gather information without prior warning. During the visit, HMRC will provide you with a notice of inspection and a factsheet and show you their ID.
They may also ask to see your records and speak to your employees. It is important to cooperate with HMRC during their visit, as failure to do so could result in penalties. Ultimately, an unannounced visit from HMRC is nothing to be afraid of – simply view it as an opportunity to ensure that your business is operating compliantly.
After the compliance check
You will receive the results of the compliance check, which will explain whether your tax position is correct or whether errors have been discovered that have led to an underpayment. If your tax position is found to be correct, then the compliance check will be closed with no adjustment.
However, if it is discovered that you have underpaid your taxes, you may be required to pay interest and penalties on the unpaid amount. In addition, the HMRC may audit your return for the year in question.
If you are found to have underpaid your taxes, you will be required to pay the additional amount due within 30 days. Depending on the reason for the underpayment, you may also be required to pay a penalty. The amount of the penalty will depend on the severity of the offense and could exceed the actual tax payable.
If you are unable to pay the amount due within 30 days, you may be able to arrange a payment plan with HMRC. However, if you fail to make payments as agreed, additional penalties and interest charges will apply. So it’s important to be fully compliant with your tax obligations to avoid any potential issues down the road.
What can HMRC Look at During a Compliance Check?
HMRC compliance checks can take a range of investigative approaches across every form of tax. Most commonly, the checks centre on self-assessment tax returns, but it can also include checks of:
- Your company tax return
- Your accounts and tax calculations
- PAYE, VAT and NICs
How Long Does the HMRC Compliance Check Process Take?
The time it takes to complete a tax investigation will depend on the complexity of the case. Straightforward enquiries, such as those relating to PAYE or business expenses, can usually be resolved relatively quickly. However, more complex investigations that cover your entire tax return could take several months to complete.
On average, most compliance checks are settled within three months. There are a number of factors that can influence the length of an investigation, such as the amount of information that needs to be gathered and reviewed, and the number of people involved. If you are under investigation, it is important to cooperate with the HMRC investigators to help them resolve the case as quickly as possible
What are the Time Limits for HMRC Compliance Checks?
HMRC can use compliance checks to investigate a taxpayer’s return and payments for up to five years and 10 months after the end of the tax year in question. However, it is more common for compliance checks to take place within 12 months of taxes being filed or paid. If HMRC believes a taxpayer has been involved in fraud or negligent conduct, then the time limit can be extended by up to 20 years.
Compliance checks can be used to verify that a taxpayer has reported all of their income and claimed all of the deductions and credits they are entitled to. They can also be used to ensure that the proper amount of tax has been paid. If HMRC finds that a taxpayer has not complied with the tax laws, they may issue a notice of assessment, which assesses the unpaid tax and may also impose penalties and interest
What Rights do Taxpayers Have During HMRC Compliance Checks?
As a taxpayer, you have a number of rights that can help you deal with and defend yourself against an HMRC compliance check. That includes the right to:
- Receive advance notice in writing of an impending compliance check
- Access all the information and records that HMRC intends to use during the course of the check
- Have the opportunity to appeal any findings or decisions made by HMRC
- Receive confidential and independent advice from a qualified professional during the course of the check
- The right to consult an adviser and be allowed a reasonable amount of time to consult an adviser before responding to HMRC.
If you are subject to a compliance check, it is important that you understand your rights and how to assert them. HMRC has a duty to conduct itself fairly, and if you feel that your rights have been violated, you may be able to take action.
With the help of a qualified tax advisor, you can ensure that you are treated fairly throughout the process and that any potential liabilities are minimised.
What are the Potential Penalties Following an HMRC Compliance Check?
If the HMRC discovers that an underpayment has been made or there are inaccuracies on your tax return, your company may incur a penalty charge. These penalties are determined by the cause of the error. You may be charged a penalty if:
- You did not take reasonable care when preparing the return
- Deliberately filed a inaccurate return
- Deliberately withheld information
The amount of the penalty is also determined by how much tax is owed. The penalty can range from 10% to 100% of the tax due. If you believe that you have been incorrectly charged a penalty, you can appeal the decision. However, it is important to note that appealing a penalty does not mean that you will not owe the tax.
Penalties are just one of the many risks associated with running a business. Therefore, it is important to take care when preparing tax returns and to keep accurate records throughout the year.
If you are found to have failed to comply with your tax obligations, HMRC may impose a penalty. The amount of the penalty will depend on a number of factors, including the seriousness of the offence and whether or not you have made a voluntary disclosure. Other factors that will be taken into account include whether you have cooperated with HMRC, the level of intent involved, and the impact of the offence on HMRC’s ability to collect taxes.
In determining the penalty amount, HMRC will also consider any financial hardship that may be caused by the payment of the penalty. If you believe that you have been unfairly penalised, you can appeal the decision to HMRC.
- The value of the ‘potential lost revenue’ (PLR). The penalty will be a proportion of this figure.
- The behaviour that caused the inaccuracy. The penalties will be greatest when inaccuracies are found to be deliberate and concealed.
- Was the disclosure prompted or unprompted? In an unprompted disclosure, where inaccuracies are disclosed before they are found by HMRC, penalties will be less.
- The range the penalty falls within. Penalties can fall into one of six ranges:
| Type of behaviour | Unprompted disclosure | Prompted disclosure |
| Reasonable care | No penalty | No penalty |
| Careless | 0% to 30% | 15% to 30% |
| Deliberate | 20% to 70% | 35% to 70% |
| Deliberate and concealed | 30% to 100% | 50% to 100% |
- Deductions could be made to the penalty according to the quality of the disclosure.
- The penalty percentage rate will then be calculated using the penalty range and the deduction.
- The potential lost revenue will be multiplied by the penalty percentage rate to calculate the value of the penalty.
- Other reductions will be considered. For example, if other penalties have already been applied to the same tax or duty.
Do you Need Help With an HMRC Compliance Check?
If your business has been elected for a compliance check by HMRC you may be worried for its future, simply call our team who can talk you though your options or complete the online enquiry and guide you in the right direction.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.