Surviving a Tax Enquiry in an “Unfair” Age

Enterprise Management Incentives

It’s been a few years now since HMRC changed the way it handled tax enquiries. The new procedures were trumpeted as a way of improving communication between taxpayers and HMRC, making the handling of enquiries more efficient, less costly and ideally much simpler. Looking back now however, those laudable goals appear to have been sacrificed on the altar of a system so loaded against taxpayers that it is difficult to say anything other than the fact that this must have been the intention all along. To demonstrate how this has been allowed to happen, you need to consider exactly how the “new” procedures operate.

After the taxpayer has been issued with a notice that he or she is to be the subject of an enquiry, the initial information requests start to arrive by letter. And that is where we usually hit the first bone of contention. Too often these days the HMRC officer will (sometimes blatantly) request information that they have at best a questionable right to receive. Particularly where taxpayers are not properly advised they would most likely supply this information without a second thought. Assuming there is an adviser around, the first dilemma then becomes whether or not to supply information that you don’t believe the officer is entitled to. Particularly where you have “nothing to hide”, why wouldn’t you just go along with the request? There are several reasons why that might be dangerous. Firstly, there is a point of principle to establish – that the enquiry should be limited to those areas that are within the proper scope. Failing to do so will likely ensure that the enquiry runs for a much longer period and consequently costs more to resolve even (and actually especially) where there is “nothing to hide”. Secondly, allowing HMRC to ride roughshod over their own rules will only encourage them to continue to do so throughout the enquiry. So on the basis that you may be advised to reject an overzealous information request, what happens then? Under the new procedure, the HMRC officer will undoubtedly dig in their heels and issue a notice to comply with the request. That notice will have statutory force and give the taxpayer 30 days to comply or appeal. An appeal however would involve an expensive hearing before a tribunal and so to avoid that, the new procedures allow for an independent 3rd party HMRC officer to review the case before that is necessary.

This whole concept of a second officer review was adopted from the procedures used by the former Customs & Excise when carrying out VAT enquiries. At that time the review was carried out in a scrupulously fair and transparent manner and as often ruled in favour of the tax payer as it did their own side. Unfortunately it is my experience – and those of everyone else in the profession I have spoken to in recent years – that the review has de-generated into a simple rubber stamp of the original officer’s view.
Which leaves taxpayers in the invidious position of either complying with a request they believe is unreasonable or attending a costly tribunal hearing, with no guarantee of success and no right to recover fees merely to decide whether or not HMRC can actually validly request information which if supplied, would most likely vindicate their position. It is hard to envisage nor have I come across many taxpayers prepared to do that! So having supplied the information, you can then assume that the officer will ask any questions that arise from their review. That may even sometimes result in further invalid information requests. But that notwithstanding, eventually the officer will either close the enquiry or issue an assessment for tax they believe is due. And where the question of that tax being due is contentious, taxpayers are then faced with exactly the same process all over again – independent reviews that are really rubber stamps followed by expensive tribunal hearings, the cost of which will often dwarf the amount of tax at stake. In effect tax payers are increasingly making commercial decisions not to fight questionable tax assessments because the cost of doing so – again with no guarantees of success or fees being awarded even if successful – is higher than simply paying up! So what can you do about this? First and foremost is to make sure you are getting the best advice and if you are already a Raffingers Stuart client then it goes without saying that you are doing.

Secondly, you should definitely consider the value of having tax investigation fee protection insurance. Most advisers including us will offer this service and it will help you to know that you will not always have to make strictly commercial decisions about accepting unfair settlements. Finally it is definitely a good idea to get advice when filing tax returns about some of the ways you can minimise your exposure to tax enquiries. It is less and less likely that HMRC select taxpayers for enquiry at random and whilst you cannot guarantee avoiding selection, there are definitely ways to reduce and manage your risk.