Why you're now more at risk of a tax investigation and what to do

During the pandemic, HMRC compliance officers were redeployed to work on government-backed business support programmes, such as the Coronavirus Job Retention Scheme (CJRS) for employees on furlough, the Self-employed Income Support Scheme (SEISS) and the Eat Out To Help Out scheme (EOTHO). However, HMRC’s post-Covid-19 compliance activity is on the rise with all businesses facing increased risks of an HMRC enquiry.

For business owners coming through the worst of the pandemic, a tax investigation is the last thing they need. Investigations can be expensive with most enquiries costing thousands of pounds in accountancy fees.

Any business can be selected for enquiry whether or not any errors have been made. It’s therefore vitally important that they are able to fund the cost of answering HMRC’s detailed questions to satisfy any concerns as far as possible. Prudent businesses will cover these costs with fee protection insurance.

Rising numbers of investigations

HMRC increased compliance investigations 36% to 102,000 in the first quarter of 2021, according to research by UHY Hacker Young which HMRC have independently confirmed was the case. That’s almost quadruple the low of 27,000 in the second quarter of 2020.

Many of those 102,000 ‘investigations’ are likely to be lower-level compliance checks rather than full-blown intrusive investigations. However, James Cordiner, Tax Investigations Manager at Markel Tax, said he expects compliance activity to ramp up over the next 24 months, given the government’s £100 million investment in a new Taxpayer Protection Taskforce.

New Taxpayer Protection Taskforce

In April 2021, HMRC said its new taskforce will expand its compliance work and commit 1,265 people to recovering money from incorrect and fraudulent claims. At that point, HMRC had opened 10,000 enquiries into Covid-19 support scheme claims, with 5,000 in the pipeline. The new investment will help it to double that to at least 30,000.

James said this activity will not just hit those suspected of fraud but will also include more routine checks and enquiries. All businesses should therefore be on high alert — even those with impeccable tax compliance history.

“Huge numbers of HMRC compliance officers were redeployed away from their normal jobs, towards Covid support schemes,” he said. “As the schemes end, they will move back to normal compliance work, leading to a resurgence in compliance activity alongside investigations into Covid support schemes.”

In addition, HMRC will continue with its longer-term goal of raising more money from tackling aggressive tax planning, avoidance and evasion, added James.

Expert help with investigations

Another risk to businesses is that HMRC enquiries have become more time-consuming and costly to deal with over the last five to 10 years mainly due to HMRC’s policy and general approach to compliance activity.

Alongside FPI cover, businesses and accountants should consider specialist support with handling enquiries. James explains that his team at Markel “know HMRC’s processes and what it can and cannot do. We can add value when corresponding with HMRC and recommend how to deal with a wide variety of situations.”

Challenging HMRC penalties

One reason for the mounting costs associated with HMRC enquiries is the tougher stance on penalties. Compliance officers increasingly take a default position that non-compliant activity is ‘deliberate’, which carries higher penalties than if it was treated as ‘careless’, together with the risk of being named and shamed.

“Our FPI clients have access to our tax advice line and one regular question we have relates to the category of behaviour and the penalties that should apply,” said James. “If you can reduce the category from ‘deliberate’ to ‘careless’, you won’t be named and shamed and it also brings in the consideration of suspending the penalty. We often find that officers have not read their own guidance about what constitutes deliberate versus careless behaviour. Therefore, when HMRC put forward their view on this, it is imperative that this is reviewed carefully to ensure the facts are fully taken into account, we can help you challenge a penalty where this is disputed to help limit the damage.”

Belligerent tax inspectors

“Having an expert team at hand to take over the enquiry can be a huge relief for businesses being investigated. James said: “Our experience is that HMRC have become more belligerent and dogmatic, with officers becoming harder to convince of the right position, even where the facts demonstrate no wrongdoing.

“We've spent a lot of time in the last 10 years assisting clients through the Alternative Dispute Resolution (ADR) process as an alternative to the more formal and much more costly tribunal process. In the majority of cases, we’ve had successful outcomes for clients when utilising this option for resolving sometimes long drawn out disputed areas of tax. The fact is that having to use the ADR facility more often shows HMRC have been more reluctant to back down.”

When looking at the growing storm of Covid-19 support scheme investigations, increased HMRC resources and tougher inspectors, the risks to businesses are set to steepen considerably. Insurance cover and specialist help have therefore become critical ways to help businesses cope with the worry and stress of dealing with a tax investigation allowing them to stay focused on their business.