If HMRC do discover an “obvious error”, on a tax return, they have the power to correct it within 9 months of the date on which it was filed. An obvious error is one where there is no doubt what the correct entry should be, such as an arithmetical error or error of principal. After this deadline and for any error that is not obvious the return can only be amended if a formal enquiry is commenced.
An officer of HMRC can commence an enquiry into any submitted return or amended return within 12 months of the date of the submission of the return. If the return is submitted late, the deadline for commencing an enquiry is extended for up to 15 months. HMRC must issue a formal notification of the commencement of the enquiry which must be received before the deadline.
Why has my return been selected for an enquiry?
An enquiry could be commenced because HMRC have specific questions about a piece of information on the return, and answering the question will satisfy HMRC and the enquiry will be closed. Other enquiries are focused on possible omissions from the return and some returns are selected at random for compliance checks. HMRC do not tell you If your return has been selected at random.
HMRC uses a software called Connect, a system that holds over 55 billion items of data relating to taxpayers including earnings and pension information, bank records from the UK and over 60 overseas countries, savings and investment records, credit and debit card accounts, records of activity on on-line platforms such as eBay and Airbnb, Land Registry data and social media activity. Using this information, HMRC can carry out analysis to identify information that suggests your tax return may not be complete or correct.
What are HMRC looking for?
The enquiry may be:
- A full enquiry, which checks all the information on the return, or
- An aspect enquiry.
An aspect enquiry checks information on one or more specific matters, such as an apparent omission of investment income from the return where they have specific information that income has been received. The enquiry will ask for information about the particular apparent omission but based on the response the enquiry can be broadened into a full enquiry.
What happens in an enquiry?
- HMRC must notify you of the commencement of the enquiry and follow detailed procedures that govern the conduct of the process. There is information on the process at https://www.gov.uk/government/publications/general-information-about-compliance-checks-ccfs1a.
- HMRC will ask for information and explanations in relation to the information given on your tax return and they may ask to see documents and records that confirm the entries made on the return.
- HMRC use enquiries to make sure that you are paying the right amount of tax. You should normally try to answer the questions they ask and provide the information they ask for.
- HMRC should only request information or documents that are reasonably required to allow them to check your tax position. If you are not sure why they are asking a particular question or want to see a particular document, you can ask the HMRC officer for an explanation.
- You should cooperate with HMRC and provide information and documents on a timely basis, but that does not mean that you must agree with everything they say, and you can challenge them if you think they are incorrect or abusing their powers.
- If you do not comply with a request for information, HMRC will normally send a formal request. If you do not send in the information requested by the time specified, you may be charged a penalty. It is better to provide information quickly and voluntarily as this demonstrates to HMRC that you are cooperating and can help reduce potential penalties.
- If you realise after the enquiry has opened that you made a careless or deliberate error in your tax return, you should seek professional help.
- HMRC can request a meeting, and you can also request a meeting if you think it would help resolve HMRC’s questions.
- You are not obliged to attend a meeting requested by HMRC, but attendance will show HMRC that you are cooperating with the enquiry.
- When you attend a meeting, you can be accompanied by a friend, relative or professional adviser and you can request that the meeting is held at a place of your choice rather than HMRC offices.
- You should ask HMRC for an agenda in advance of the meeting so that you can be fully prepared, and you can ask how long the meeting is expected to last.
- Ask for a copy of HMRC’s notes of the meeting and check them carefully. If you disagree with anything in the notes, notify HMRC in writing, and let HMRC know if you realise that the information you gave was incorrect or incomplete.
- When HMRC ask for information during the enquiry, they will often set a deadline for you to reply. Let them know if you can’t respond within this timeframe and suggest an alternative date. You may find that HMRC then take a very long time to deal with your reply. You are entitled to complain if you think they are taking too long to respond to you.
The outcome of the enquiry
At the end of the enquiry, HMRC will advise you in writing that it has been concluded. They will let you know if they now accept the return as filed, or if an adjustment is needed.
If HMRC think that your tax returns are incorrect, they will send a schedule of adjustments. You do not have to agree with these, and you can put forward your own suggested figures. If they do not consider that you have been negligent, they will request that you amend the return and will adjust it themselves if you do not do this within 30 days. There will be interest on any late payment of tax.
If HMRC believes that you have been guilty of neglect it will normally issue a contract settlement agreement which will show the tax underpaid and ask you to make an offer in settlement including interest and penalties. Under the settlement, you agree to pay the tax, interest, and penalties in consideration of HMRC giving up its rights to pursue you for the amounts owed. The contract is legally binding and is difficult to change once it is signed. You will be expected to pay the full amount owed immediately and further interest will be charged if payment is delayed. If you need time to pay the full amount, you should let HMRC know before the agreement is signed.
If you cannot agree with HMRC the amount of tax owed, there are three ways in which you can try to resolve the case:
- You can ask for an “internal review” where a different HMRC officer who has not been involved before reviews all the information about the case and may reach a different conclusion.
- Alternative Dispute Resolution
This process involves a facilitator working with the taxpayer and the HMRC case officer to try to broker an agreement between them. The facilitator will be an HMRC officer who has been specially trained and who has not been involved in the dispute before.
Entering the ADR process will not affect your existing review and appeal rights.
ADR is a quick and flexible process, and you may want to see if it can help before HMRC make a formal decision about your case. It can help focus on areas of the dispute that you believe need clarification. It can be particularly useful where communication has broken down, there is disagreement about the facts, or a misunderstanding about how information and evidence has been used or disregarded.
Even if ADR does not resolve the dispute, it can help clarify the issues that need to be addressed in a tribunal hearing. Whatever the outcome of the ADR process, you are still able to appeal HMRC’s formal determination.
More information on ADR can be found at https://www.gov.uk/guidance/tax-disputes-alternative-dispute-resolution-adr. If you are not sure whether ADR would be suitable for your case, you can email HMRC Dispute Resolution Unit at dispute.resolution@hmrc.gsi.gov.uk.
- First Tier Tax Tribunal.
HMRC can make a formal determination of the tax they consider is due. This creates a legal obligation on you to pay the tax. You can appeal against this determination to the First Tier Tax Tribunal https://www.gov.uk/tax-tribunal.
Penalties for errors and mistakes on returns
There is a ‘behaviour based’ system of penalties for inaccuracies on tax returns. These range from 0% to 100% of the tax underpaid (or refund over claimed). 0% applies where a taxpayer has taken reasonable care, but later discovered an error and discloses this to HMRC. At the other end of the scale, 100% penalties can apply when a taxpayer deliberately makes a false return, conceals the fact, and only accepts the position following a challenge by HMRC.
Penalty ranges:
| Behaviour | Penalty range |
| Reasonable care | no penalty |
| Careless behaviour | from 0% to 30% If after prompting by HMRC a 15% minimum applies |
| Deliberate misstatement | from 20% to 70% If after prompting from HMRC a 35% minimum applies |
| Deliberate misstatement which is then concealed | from 30% to 100% If after prompting from HMRC a 70% minimum applies |
There is detailed technical guidance on these terms on the HMRC website at https://www.gov.uk/hmrc-internal-manuals/compliance-handbook/ch81110.
