HMRC Tax Enquiry: How to Respond and What to Expect

A letter from HM Revenue and Customs (HMRC) to check your tax affairs can be worrying. The word ‘enquiry’ suggests that something has gone wrong, but this is a way for HMRC to ensure that all income and gains have been declared, the correct reliefs claimed and the proper amount of tax paid.

However, enquiries into such matters by HMRC should not be ignored or treated casually. HMRC has formal powers to ask questions, request records and, in some cases, charge penalties if information is not provided. The best approach is to be calm, organised and prompt. A well-handled enquiry is often resolved more quickly and with less stress.

Understand the enquiry

HMRC’s letter should explain the information required, the tax year (or years) involved and the deadline for replying. If you are unsure whether the letter is genuine, a checklist of genuine HMRC contacts can be found online at tinyurl.com/HMRCchk.

Make a note of the response deadline. If it cannot be met, contact HMRC before the date passes and explain why more time is needed. HMRC may agree to an extension, especially where there is a reasonable explanation and you are clearly cooperating.

The scope of the enquiry

Some enquiries focus on one point, such as employment expenses, rental income or business costs. Others are broader and may cover a whole return or several taxes. It is important to understand the scope. The questions asked must be answered, but unrelated material need not be provided unless it is relevant or other errors have been found and need to be disclosed.

Gather the documents that support the figures HMRC is checking. These may include invoices, receipts, bank statements, mileage logs, payroll records, rental statements, contracts or calculations. Keep copies of everything sent to HMRC. If records are missing, explain any alternative evidence that is available and present information clearly rather than sending a disorganised bundle of paperwork.

Replies to HMRC should be polite, factual and complete. If a question is not understood, request clarification. If an answer depends on assumptions, provide a short explanation alongside the documents, so the HMRC officer can see how the figures fit together.

During the enquiry, future tax returns should continue to be filed and any tax due should be paid. An enquiry into one year does not pause other obligations. If HMRC eventually finds that extra tax is payable, interest may be charged from the original due date. If payment is a problem, tell HMRC as early as possible and discuss ‘time-to-pay’ options.

If a return is found to be incorrect, do not hope the issue will disappear. Telling HMRC voluntarily, explaining why the mistake happened and helping to put it right can reduce the risk and level of penalties. HMRC normally looks at why an error arose, whether it was disclosed promptly and the assistance provided during the enquiry.

Professional help

Professional support should be sought if the potential tax that might be underpaid is believed to be substantial, the enquiry is wide-ranging, there are poor records, HMRC is suggesting penalties, or there may have been a serious mistake. A good adviser can help establish what HMRC is entitled to ask for, organise the evidence and explain the position clearly. They will also be able to ensure that HMRC is acting within its legal parameters, that the information requested is reasonably required and that HMRC is not simply engaged in a ‘fishing expedition’.

Know the possible outcomes

At the end of the enquiry, HMRC should explain the outcome. There may be no change, a repayment, or extra tax to pay and possibly interest and a penalty. If you disagree with HMRC’s conclusions, a review can be requested or an appeal made to the tax tribunal.

Practical tip

Enquiries can be simple or complicated and there are various legal powers to underpin information requests. However, they are subject to time limits and other conditions, and professional advice may be invaluable to ensure that HMRC is acting within its powers.