Several factors can trigger an HMRC tax investigation, and a key aspect will be persistent failure to submit tax returns on time.
The law provides that taxes are levied on individuals, companies, and other entities in certain instances, such as when income or gains arise, and in other instances, such parties collect taxes for HMRC.
The existence of tax avoidance and tax evasion means that in order that taxpayers shoulder their fair share of the tax burden they can be subject to an HMRC tax investigation, commonly referred to as a tax enquiry or compliance check.
HMRC Duty To Collect In Tax
HMRC has a duty to collect tax by virtue of Section 5 of the Commissioners for Revenue and Customs Act 2005. Such taxes commonly scrutinised would be VAT, PAYE, Corporation Tax, Income Tax, Capital Gains Tax, CIS, IR35
HMRC’s Charter under Section 16A of the Commissioners for Revenue and Customs Act 2005 says:
HMRC is here to collect the tax that pays for the UK’s public services.
We’ll help you meet your tax responsibilities and make sure you get any benefits, tax credits, refunds or other support you can claim. However, we will take firm action against the small minority who bend or break the law.
Taxpayer Compliance Failures Triggering A Tax Investigation
A key trigger for an HMRC tax investigation will be failures of compliance.
There are two features of tax compliance in the regime of self assessment ie. when the taxpayer tells HMRC how much they owe it:
- Submission of tax returns.
- Payment of tax due.
Submission Of Tax Returns
To put this in context, most people need an income to pay bills such as food and have a roof over their heads. Vast numbers of people do not have to submit a personal self assessment tax return because they are employed and their employer will calculate their tax and collect it for HMRC through a business payroll scheme.
That still leaves a considerable number of people who do not live on benefits, inheritance or mum and dad and who require an income. They may be self employed or directors of companies and they will usually have to submit a self assessment tax return ot notify HMRC what they owe.
Duty To Register For Taxes
The taxpayer has a mandatory duty to register with HMRC for the taxes they are liable to pay without HMRC prompting them. It, therefore, follows that perhaps the most basic way in which a taxpayer can fail to be compliant is to either not submit a tax return or for it to be filed late after they have registered to provide it. Persistent late filing or failure to submit a return will be a huge highlight for HMRC to consider in opening a tax investigation. If a taxpayer has previously submitted returns and fails subsequently to do so, this would almost inevitably illuminate an issue for HMRC.
When a party ceases to be required to submit returns after registering for taxes there are procedures to stop this. Such as deregistering for VAT or closing down the payroll PAYE scheme or ceasing to trade a limited company and being dormant. Failure by the taxpayer to follow the correct procedure will increase the risk of an HMRC tax investigation being opened.
Cheating The Revenue Risk
Failure to submit tax returns altogether by not registering for tax when required can constitute the criminal offence of cheating the public revenue at common law. This is a very serious matter.
Late Payment Of Tax
The normal process of late payment of tax or even non-payment of tax results in HMRC debt collection processes kicking into action.
Initially, an HMRC enforcement section will be involved, before later HMRC tax debt collectors may swing into action if necessary.
However, persistent late payment may highlight for HMRC matters unrelated simply to the ability to pay and trigger a tax investigation.
Errors On Tax Returns
Potentially incorrect and inconsistent information on tax returns can be discovered by HMRC in various ways.
Most commonly this will arise either from the direct disclosures on the tax returns or from inconsistencies in the information within the return.
Disclosures On Tax Returns
Conceivably the most common direct disclosure on a tax return that might highlight an issue for HMRC to review is the use of estimates, particularly if this is a persistent event.
Estimate And Provisional Figures
The use of estimates and provisional figures indicates the potential for poor record keeping. That alone is sufficient to suggest the tax return could contain inaccuracies that HMRC may consider warrant investigation. It is a taxpayer’s responsibility to keep underlying tax records to support the information in the return and if challenged the taxpayer is under a duty to come clean to HMRC.
Inconsistencies
Inconsistencies from year to year may trigger tax investigations by HMRC because it is anticipated that there will be certain consistencies within the numbers. For example, a company that makes sales of £10 million is likely to need more than one member of staff to do so and therefore will likely have staff costs above minimal levels. Obviously, it will be industry dependent.
Industry norms can also highlight matters for investigation because certain sectors of the economy will be prone to established costs and profit margins.
Low income or consistent losses may spark HMRC enquiries to seek to understand the position. For example, how people are able to afford certain assets with a very low income or in the case of companies what the commercial rationale is for a company that loses money year on year.
Tax Avoidance Scheme Disclosures
If a taxpayer has made use of a tax avoidance scheme then they must on their tax return disclose details by virtue of Section 305A of the Finance Act 2004. This arises from the DOTAS regulations.
However, the effect of making such a disclosure for many tax avoidance schemes it may automatically trigger an automatic HMRC tax enquiry being opened. This was commonplace for disguised remuneration schemes.
Tax Relief Claims
Tax reliefs claimed on tax returns can trigger HMRC tax investigations.
A well known one is the opening of HMRC tax enquiries into claims made for research and development tax credits. Such relief has been widely abused and highlighted by an HMRC report Approach to Research and Development tax reliefs 2023 to 2024 published on 30 October 2024.
High Risk Industries
Certain industries might be considered to be a high risk for tax manipulation such as construction due to the potential for material cash transactions.
Computer equipment and mobile telephone trading have been extensively considered in the field of missing trading fraud and VAT fraud.
Another area that can be considered a risk for HMRC is that of online sellers. This has now sparked an information sharing arrangement between HMRC and certain online platforms. This was brought in through Section 349 of Finance (No. 2) Act 2023.
