HMRC is eligible to keep an eye on your tax returns regarding any tax like a corporation tax return. HMRC now has a powerful and advanced computer system and software that does this for them. With the push to digitalization and HMRC’s making digital tax initiatives, they are becoming more efficient. They can get access to information about you and your financial affairs from many different sources. 

So, unless you hear otherwise from HMRC, you will pay any outstanding liability based on the figure shown in your self-assessment tax return, and this is what is known as a process now, check later system. 

“HMRC is eligible to keep an eye on your tax returns regarding any tax.”

HMRC’s extensive inquiry powers are an essential element of the self-assessment tax system to encourage compliance and honesty. Personal and trustee tax returns can be managed by HMRC. All this process applies to the tax return of the taxpayer and other changes made in it. The term inquiry does not have a statutory definition and therefore carries its typical dictionary definition. In their inquiry manual paragraph EM0091, HMRC put forward the description as seeking information, asking, and questioning. Anything that pops out as an error or uncertainty is questioned by HMRC. The investigations must be dealt with formally. 

“In their inquiry manual paragraph EM0091, HMRC put forward the description as seeking information, asking, and questioning.”

What Prompts an HMRC Enquiry?

The vast majority of inquiries begin because HMRC suspects that there is something wrong with your self-assessment tax return, as detected by their advances in the computer system and network. HMRC has information from other sources that conflict with what is shown on the return, proving the error on the tax return! 

HMRC often uses nudge letters to prompt taxpayers to recheck an entry or lack access to a self-assessment return in a particular area. Nudge letters are not an inquiry in itself, but if you don’t deal with the request for information on a nudge letter, the chances are HMRC will open a formal investigation into your tax return. There is what’s known as an inquiry window is a time limit HMRC has to open a formal inquiry. HMRC can open a discovery assessment after the process. 

Suppose you made your self-assessment tax returns for the year 2019-2022 for UK VAT returns and submit them on 31st January 2021, the deadline date. Assuming HMRC receives the return on the same date, then under the tax’s management act of 1970, they will have up to 12 months from this date to open an inquiry. HMRC can open a discovery assessment after this 12-month inquiry window. 

There are generally three types of inquires HMRC can open 

  1. An aspect inquiry relates to one or selects the specific entries in your return. As long as it’s handled well and honestly, an aspect inquiry is often swift and to the point. 
  2. Random inquires still happen. HMRC will select several random returns, not based on any risk factors primarily designed to ensure that the inquiry system works well. And to send out a little bit of a message that they do check people’s self-assessment returns. 
  3. A full inquiry goes a bit deeper, and it is where HMRC seeks to investigate every corner of your submitted tax returns to test your every financial dealing. 

Some Steps to Avoid HMRC Investigations:

There are many steps and checks and checks you can make to reduce any HMRC inquiry event significantly. But these are the three we recommend you focus on. 

1.Get your assessment tax return drafted as early as possible so you, on your accounts, get time to review the return objectively. Don’t forget from 6th April to 31st January, you have almost nine months to prepare, complete, and submit your return. So there is plenty of time. If something looks odd, when you take a step back, it will allow you to escape from a back door to wipe out any accidental errors or omissions before submission. You are exercising reasonable care. Honest mistakes do happen, and HMRC does understand this, but you want to avoid investigation at the very beginning. You will require some extra time and extra care, like some extra salt you add to your plate to enjoy your meal; otherwise, it may prove to be a pinch of salt on your wounds.

“Get your assessment tax return drafted as early as possible.”

2.Use supplementary notes where appropriate. In your self-assessment tax return, HMRC provides blank boxes to add extra notes optionally. You can add text to provide additional helpful information and explanations that can provide HMRC with some clarity and reduce any misinterpretation or misjudgment of your figures that their technical systems would not accept. The scene would be more complex if you would have tax returns regarding real estate tax, overseas income tax, etc.  

“Use supplementary notes where appropriate.”

3.Be honest and don’t deliberately mistake, fabricate, or conceal material numbers to save a bit of tax. Yes, there is a moral argument about why some wealthy individuals and large organizations don’t pay their fair share of taxes. But for most of us ordinary folks, this is something we cannot directly control. So, therefore, it’s wise not to let this skew judgment and the legal obligation with your tax affairs. 

If HMRC does launch an inquiry and dig deeper, their tax investigators are trained to unearth such intent through their questioning. And this could lead to a complete examination. Your time and energy are then diverted away from your job, business, and family. 

Quite frankly, you could be facing a heap of issues, not to mention potential heavy penalties, interest, and underpaid tax. And in the absolute worst-case scenario, a criminal investigation. You will have to save your mental energies and effort to do what you do the best. 

And on a final note, the law does allow taxpayers to organize their financial affairs to minimize their liability tax. This is known as tax avoidance which was acting within the strict letter of the law is entirely legal. It is not a fabricated move; rather than it is a wise step towards saving our money. However, tax evasion is strictly illegal, and HMRC has excellent powers to ensure that people operating against the law shall face the deadly consequences too!