Many taxpayers assume an HMRC enquiry only arises when there is an error on a tax return.

Increasingly, that is no longer the case, as our tax investigation team have been finding out.

Over the past year we have seen a growing number of HMRC compliance checks triggered by information received from third parties, automated data matching exercises and targeted compliance campaigns.

In several recent cases, the taxpayer had correctly reported their affairs, yet significant professional time was still required to satisfy HMRC’s questions and bring the matter to a conclusion.

HMRC’s increasing use of data

HMRC now receives information from a wide range of sources, including banks, investment platforms, overseas tax authorities, pension providers, e-commerce websites and Companies House.

These are all processed by the tax authority’s Connect system, which is an advanced, AI-driven data-matching platform that is used to cross-reference billions of financial data points and identify undeclared income or tax evasion.

Where the information held by HMRC appears inconsistent with a tax return or simply raises a question, an enquiry may be opened.

In some cases, taxpayers receive “nudge letters” asking them to review and explain transactions or sources of income.

Whilst these letters are not the same as a formal enquiry, they should not be ignored. Responding incorrectly or after the typical 30-day deadline has passed can sometimes lead to further questions or additional scrutiny from HMRC.

Recent examples

A client received an HMRC nudge letter suggesting foreign income had not been declared.

Following a detailed review, it became clear that the income had in fact been reported on the tax return, but under the wrong category.

The return was corrected and HMRC subsequently closed the matter. Interestingly, the amendment resulted in a tax repayment to the client rather than additional tax being payable.

In another case, HMRC reviewed a taxpayer’s claim for relief relating to Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) investments.

What began as a relatively focused enquiry expanded into questions regarding pension contributions, annual allowance calculations and transactions within a SIPP (Self-Invested Personal Pension).

Although all information was ultimately accepted and the enquiry closed with no adjustments required, considerable professional time was needed to manage the correspondence and address misunderstandings as the scope of the enquiry widened.

A further client experienced delays in receiving a substantial VAT repayment, after HMRC issued pre-credit verification queries following a major capital purchase.

Prompt responses and ongoing liaison with HMRC enabled the repayment to be released, providing an important boost to business cash flow.

The hidden cost of getting it right

A common feature across all of these cases is that the clients had not deliberately done anything wrong.

However, proving this to HMRC still required professional support, the gathering of evidence, reviewing records, preparing responses and engaging with HMRC officers.

Even relatively straightforward enquiries can develop over several months and require a significant amount of tax adviser time.

In some cases, issues arise simply because information is incomplete, misunderstood or presented differently from HMRC’s expectations.

How our Tax Investigation Service (TIS) can help

Our TIS is designed to cover the professional fees incurred in dealing with qualifying HMRC enquiries and compliance checks.

This means that if HMRC opens an enquiry, requests information or launches a compliance review, clients can have confidence that professional support is available to manage the correspondence, gather the required information and deal with HMRC on their behalf.

As HMRC continues to expand its use of data analytics and targeted compliance activity, the likelihood of receiving some form of enquiry is increasing, even for taxpayers who have taken reasonable care with their affairs.

For many clients, our Tax Investigation Service provides reassurance that the cost of responding to an unexpected enquiry will not become an unwelcome financial burden.

Find out more about our Tax Investigation Service or speak to your usual Milsted Langdon adviser.

Disclaimer: The information in this document is intended for general advice only. No action should be taken in respect of individual circumstances without specific professional advice being sought.