What to do in a dispute with the taxman: HEATHER ROGERS explains

Heather Rogers is the founder and owner of Aston Accountancy and This is Money’s resident tax expert.

After I wrote about tax evasion and the ways HMRC catches up with people, I will elaborate further on tax enquiries.

As a taxpayer, you might find yourself, or your business, the subject of a tax enquiry even if you believe that you are fulfilling your obligations to the letter.

Remember, even if an enquiry is opened into your affairs, it doesn’t mean you have done anything wrong, just that something doesn’t look quite right to HMRC.

In HMRC’s annual reports, there is an item called ‘compliance yield’. In layman’s terms, this is tax that would have been lost without HMRC’s enquiry work.

Targets are set for such yield, and HMRC’s 2022/23 annual report says it collected £34billion – though its target was £36billion. A lot of this is due to taxpayer error or failing to take reasonable care, rather than deliberate behaviour.

Sometimes HMRC does not pursue unpaid tax if it is not cost effective, or there are no assets.

Meanwhile, in circumstances where you feel HMRC has messed you about – failed to treat you fairly, owes you money, or not responded to you within a reasonable time – the boot is on the other foot, so to speak.

If you are aggrieved about its behaviour, you can pursue HMRC under its complaints procedure, which unfortunately is lengthy and quite involved.

Let’s look at tax enquiries into taxpayers first, but do scroll down to find out how to go after the taxman for its mistakes!

Why might HMRC open an enquiry into your taxes?

HMRC receives information from lots of sources, which were listed in detail when I explained tax evasion.

These include overseas investment information. For example, if you have money in an offshore investment, HMRC will find out.

Similarly, if you have sold a property that is not your main residence, the Land Registry will give you away to HMRC, and if you haven’t declared and paid any tax due on the sale, expect an enquiry letter.

However, HMRC also has systems in place that detect risk and analyse data and if something about your affairs doesn’t look right, this can prompt an enquiry to be opened.

In the business world, particularly where small businesses are concerned, the following can prompt an enquiry:

– Large fluctuations in turnover/expenses

– Profit/margins not consistent with other similar businesses

– Continued unprofitability but no other obvious source of income to support your lifestyle

– An enquiry into another business flags up issues with yours, for example HMRC is investigating one of your customers or suppliers.

Additionally, HMRC does have particular trends in what it will pursue, from time to time: it might be restaurants and takeaways one year and inheritance tax another.

Estates of deceased people are regularly subjected to enquiries, usually on the valuation of the deceased’s assets.

What to do if you get a letter about a tax enquiry from HMRC?

First of all, don’t panic. HMRC can get things wrong sometimes and it may be that there is no tax underpaid.

If you have an accountant or tax adviser you should contact them straight away. They should have received a copy of the letter sent to you if they are authorised to act on your behalf with HMRC, but don’t assume they have – pick up the phone and speak to them.

The enquiry may be specific, and stipulate that it is just looking into one particular part of your tax return – for example you may have missed off some income, or you may have sold an asset that you haven’t reported – or it might be a full enquiry into the whole return.

HMRC usually has a year from the date you filed a tax return to open an enquiry. 

However, if it finds errors, however innocent, it can go back four years and make back assessments. It can go back further if the errors are not innocent.

– Innocent errors – 4 years

– Careless errors – 6 years

– Offshore income errors – 12 years

– Deliberate errors – 20 years

If you don’t have an accountant, can you handle this yourself?

I would always say, seek professional advice. If HMRC are just enquiring into one part of your return and you are happy as to why that is, and you have not deliberately evaded tax, you may feel you can deal with the matter yourself.

However, sometimes enquiries can develop and you can be in a minefield if you are not represented by an experienced practitioner.

As I said in my tax evasion article, HMRC can’t go on fishing expeditions into your affairs, but it doesn’t always stop them trying!

This is usually down to the inexperience, or, on occasion, over-zealousness of the person dealing with the enquiry.

I should say here that you should see who has signed the letter. If it is signed by an ‘Inspector of Taxes’, they are very much more experienced than an ‘Officer of HMRC’.

HMRC does have a tax enquiry manual. This gives a lot of information about how its progresses enquiries and the guidance which HMRC itself is subject to during an enquiry.

It is worth a look if you are undergoing an enquiry and your accountant should read it as well!

What information will HMRC ask for?

In a full enquiry into your business, HMRC will want copies of your business records to ensure that your return figures are correct. If you have an accountant, you can ask them to handle the enquiry for you, but the responsibility is yours and yours alone.

Don’t be obstructive. Cooperation is important. At the same time, ensure that what HMRC is asking for is relevant to the enquiry.

It must be ‘reasonably required’. If it isn’t then it may fall under the ‘fishing expedition’ description. A good accountant or tax practitioner will be able to assist here.

Tax tips from Heather Rogers

How long will you have to provide the information requested?

The initial letter will usually give you around 30 days, but it is only a suggestion, however intimidating it may appear!

If HMRC is only asking for a little information, 30 days may be sufficient anyway, but for full business records, you will no doubt need more time.

Normally, your accountant will call HMRC and speak to the person handling the enquiry, both to make contact and to arrange a mutually suitable date.

In enquiries you will have a direct line number and usually an email address, should you choose to communicate by email with HMRC. They will ask you to confirm in writing if this is the case.

If you don’t provide the information, HMRC will raise a section 36 notice – this is a ‘notice to produce’.

The information requested must be ‘reasonably required’. You will then have 30 days to comply or face financial penalties.

These notices can also be sent to third parties, like your bank. You can appeal direct to HMRC within 30 days of receipt and then to a first-tier tax Tribunal, unless a Tribunal has pre-approved the notice, but you must state your grounds for appeal.

A third party can appeal if the requirement is too onerous.

How long do tax enquiries last?

A simple enquiry may be over in a few weeks, but more complex ones can take years.

HMRC might take some time to reply, whatever the type of enquiry.

Obviously, it has to work through the information you have provided, but it is often working on many cases and sometimes a reply can take time. In fact, the enquiry may be p

rolonged as HMRC is very slow to respond sometimes. It may even advise you of this.

Always check it has received your documents; it should acknowledge receipt, especially if they were sent by email.

What happens during the tax enquiry?

HMRC may request further information, visit your premises, and ask for a meeting with you, or it may carry out the whole enquiry by correspondence alone. It all depends on your circumstances.

If HMRC has found nothing wrong, it will close the enquiry and send you a closure notice.

If it has found errors, then it can go back to earlier years, if it suspects a loss of tax on those years. The length of time depends on the errors, as explained above.

However, once this is finished, HMRC issues a closure notice and its assessment, penalty determinations, interest calculations and amended self-assessment tax computations.

You can appeal and have 30 days to do so.

You will also be asked to sign a Certificate of Full Disclosure. On signing make sure you have disclosed everything, as serious ramifications arise if later on HMRC find out you have not.

What if an enquiry has gone on for years and appears to have stalled?

There are normally three ways an enquiry can be closed.

– HMRC issues a closure notice

– The taxpayer enters into a contractual settlement with HMRC

– An application is made to the Tribunal to close the enquiry

In the last scenario, HMRC must show to the Tribunal that it has reasonable grounds for continuing its enquiries. If it can’t, the Tribunal will issue a closure notice.

The taxpayer must have provided to HMRC all the information reasonably required and have responded in a timely manner.

Sometimes, the Tribunal will direct HMRC to close the enquiry within a specified time, if information has been supplied but not acted on.

A word of caution is needed here, because if at a later date a material tax irregularity is identified by HMRC, then higher penalties and even prosecution can occur if an application was made to the Tribunal to close an enquiry.

An alternative to a closure notice can be a review by senior officer, or Alternative Dispute Resolution (ADR).

This can be used in a variety of circumstances, particularly where communication has broken down, or the taxpayer and their accountant have different views from HMRC on the facts.

However, in my experience, you are still dealing with HMRC and sometimes the Tribunal route is better.

If there is a dispute over a point of law, for example where you believe a relief is due but HMRC does not, then you will end up at the Tribunal anyway.

What about when HMRC messes up?

If you think HMRC has got things wrong, owes you money, or is failing to respond about your tax, you can make a complaint. Here is the process – there are unfortunately a lot of steps to follow.

1. Contact HMRC about the matter

You can call, go online or write to HMRC. Call HMRC on 0300 200 3300. Have your National Insurance number to hand, and your Unique Tax Reference (UTR) if you are on self-assessment.

Bear in mind when calling to avoid busy times, as it can take a while to get through to a person.

If you write, quote your NI number and UTR. If you use the postal service, you can use HMRC’s ‘Where’s my Reply?’ tool.

2. Move on to making a formal complaint

If you do not receive a response, or you are unhappy with the response you do receive, or there are unacceptable delays, you can complain.

Again, you can call, go online or write to HMRC.

Explain what has happened and why you are unhappy. Say how you would like your complaint resolved. Enclose any supporting documentation.

Here are the contact details for making a complaint.

– Call HMRC on 0300 200 3300, with your National Insurance number to hand.

– To complain online, you will need a Government Gateway user ID and password. If you do not have a user ID, you can create one when you complain.

– If you write to HMRC, quote your National Insurance number, and your Unique Tax Reference (UTR) if you are on self-assessment.

3. What if you are still not happy with HMRC’s response?

You can request a second review by another officer at HMRC. Follow the complaint procedure above again and mark it ‘second complaint’.

If that does not work, you can ask the Adjudicator’s Office to review your complaint.

If you disagree with the Adjudicator’s Office, you can ask your MP to refer your complaint to the Parliamentary and Health Service Ombudsman.

Find your MP and how to contact them here. They might forward your complaint direct to the Ombudsman themselves, but check if they have done so.

4. Tips on getting your complaint dealt with

It is worth marking your envelope ‘formal complaint’ as a lot of post is not being responded to by HMRC at the moment.

In normal circumstances, I would recommend sticking to HMRC’s rules regarding complaining and follow the exact procedure I have laid out here.

However, circumstances are not normal and HMRC is not always replying.

If this happens to you, and you write a complaint and do not receive a reply within a reasonable time, 28 days for example, I suggest you write again and mark the letter and your envelope ‘second complaint’.

If you do not hear back after another 28 days after writing a second time, I suggest contacting the Adjudicator’s Office directly.

When this office receives your letter it will write back to you, enclosing an authority form if you use an accountant to handle your tax affairs.

If, however, you’re handling the complaint yourself, it will deal directly with you.

Obviously, you can contact your MP at any time you feel that you are not receiving the service to which you are entitled.

You can pay an accountant for help if you feel this would be less stressful for you.

If you find that you have had a shortfall due to HMRC having information in its possession which it has not acted on then you can seek redress. If this happens I would advise seeking professional help from an accountant.