HMRC Compliance Checks: What to Expect

“Compliance check” covers everything from a one-line query to a full fraud investigation, and the letter rarely tells you which you are facing. Establishing the power, the scope and the risk before you reply is the difference between a check that closes quietly and one that runs for years.

What a Compliance Check Is

“Compliance check” is HMRC’s umbrella term for any examination of a taxpayer’s affairs. It covers everything from a single query about one figure to a full investigation of a business across every tax and several years.

The phrase is deliberately neutral, and that neutrality is unhelpful. The first thing to establish on receiving a letter is which kind of check this actually is, because the powers, the time limits and the risks differ enormously between them.

The Types of Check

The Powers Behind the Letter

Enquiries

HMRC may enquire into a self-assessment return under s9A TMA 1970 (individuals), s12AC (partnerships), or Schedule 18 FA 1998 (companies), provided it gives notice within the enquiry window: normally twelve months from the date the return was delivered, where the return was filed on time.

Once that window closes, HMRC needs a discovery assessment under s29 TMA 1970 instead, which imposes conditions HMRC must satisfy. Our resource on discovery assessments covers those, and Langham v Veltema is the taxpayer’s principal defence.

Information notices

Schedule 36 FA 2008 allows HMRC to require documents and information reasonably required to check a tax position, from the taxpayer, or from a third party, or from a financial institution. There are appeal rights against some notices and not others, protections for privileged material, and penalties for non-compliance.

Inspections

Schedule 36 also permits inspection of business premises, assets and documents. An unannounced visit requires the approval of an authorised officer or the tribunal. Private homes are outside the power unless used for business.

How to Respond

1. Establish the power and the scope before providing anything.
2. Check the enquiry is in time. A notice given after the window has closed is ineffective, and HMRC then needs a discovery assessment with everything that entails.
3. Do your own review first. This is the single highest-value step. If there is a problem, finding it before HMRC does converts a prompted disclosure into an unprompted one, which materially reduces the penalty range. The window closes the moment HMRC raises the issue.
4. Answer what is asked, accurately and no more. Volunteering material outside the scope invites the check to broaden.
5. Never guess. An inaccurate answer given from memory is worse than a delayed one given from the records.
6. Keep everything in writing, and take a note of any meeting. HMRC will.
7. Watch the deadlines on any information notice and appeal where appeal rights exist.

Meetings

HMRC frequently proposes a meeting. There is generally no obligation to attend one in a civil check. A meeting can be useful where the issue is genuinely factual and easily explained, and damaging where the client is likely to speculate. If you attend:

• agree an agenda beforehand;
• take an adviser and a note-taker;
• take questions away rather than answering technical points on the spot;
• correct HMRC’s note promptly and in writing if it is wrong.

What Is Actually at Stake

• The tax, plus interest from the original due dates, which is not excusable and runs regardless of any appeal.
• Penalties, driven by the behaviour finding far more than by the amount. Careless, deliberate, and deliberate and concealed carry very different ranges.
• The time limits. Four years ordinarily, six for carelessness, twenty for deliberate conduct. The behaviour finding therefore controls how far back HMRC can reach.
• Publication of deliberate defaulters’ details.
• Personal liability notices transferring a company’s penalties to an officer.
• Escalation to COP9 or to criminal investigation.

Because behaviour drives all of this, it is where the argument should be concentrated. Under HMRC v Tooth and Auxilium, a deliberate inaccuracy requires knowledge of the error and an intention that HMRC rely on it. HMRC frequently reasons backwards from the size of an understatement, and that reasoning should be resisted.

Bringing the Check to an End

• Closure notice. An enquiry ends with a closure notice stating HMRC’s conclusions. If HMRC is drifting, you can apply to the tribunal to require closure: see closure notice applications. The notice fixes the subject matter of any appeal, though not the arguments HMRC may run within it: Tower MCashback.
• Contract settlement. Most checks end in a negotiated settlement rather than an assessment. There is no appeal against one, so the drafting matters: see contract settlements and letters of offer.
• Appeal. Where you cannot agree, the statutory review and tribunal route applies: see the appeals ladder.
• Nothing further. Some checks simply close with no amendment. That outcome is more common where the response was accurate, prompt and confined to what was asked.

Checklist

1. Identify the power, the taxes and the periods.
2. Check the enquiry window.
3. Review your own position before responding.
4. Consider whether an unprompted disclosure is available and worthwhile.
5. Respond in writing, within scope, from records rather than memory.
6. Diarise every deadline, including appeal rights on information notices.
7. Watch for escalation signs and take advice early rather than late.
8. Fight the behaviour category before the arithmetic.
9. Plan the ending (closure notice, settlement or appeal) from the start.

Frequently Asked Questions