Sarah Scala is an Associate Partner and Head of the Tax Dispute Resolution Team at Claritas Tax. Sarah also founded the Contentious Tax Group (CTG), hosted monthly by Claritas, and attended by Tax Dispute Resolution experts and Specialist Lawyers from across the UK.
In this article, Sarah draws from her ten years of working full time on resolving tax disputes and from the insights provided through her involvement in the CTG to advise you of what to expect from HMRC in 2023 in the world of tax investigations, enquiries, and disputes and how best to handle it.
HMRC Enquiries
In normal circumstances, HMRC have twelve months from the date a tax return is received to carry out a check of the entries on that tax return. Last year, of the 12.2 million 2020/21 tax returns expected to be filed by 31 January 2022, 10.2 million were filed by the due date, with 630,000 of those being filed on the 31 January 2022. There will therefore be an increase in the number of taxpayers who receive enquiry letters in February 2023, which coincides with the anniversary of the 2020/21 tax return filing deadline, with the letters taking a couple of weeks to arrive by post.
Winning Tactics
- Check the enquiry is valid. Was the letter received by the taxpayer within the enquiry window?
- Is everything HMRC is asking for reasonably required to check the tax return of the taxpayer under enquiry and is all information requested within the taxpayer’s power and possession. For example, full bank statements might not be reasonably required and certain company records may not be in the possession of a shareholder.
- What caused the error? What penalties are likely to apply and how can they be mitigated?
HMRC Investigations
The HMRC Taxpayer Protection Taskforce, set up in March 2021 to tackle abuse of the COVID 19 support schemes, is to be wound down from March 2023. The taskforce’s 1,000 staff will therefore move into other areas of HMRC. This could lead to an increase in HMRC Code of Practice 8 and Code of Practice 9 activity.
The number of newly opened Code of Practice 8 enquiries has dropped from 297 (2016-17) to 176 (2021-22). Newly opened Code of Practice 9 enquiries dropped from 549 (2016-17) to 341 (2021-22). Both types of enquiries are opened by HMRC’s Fraud Investigation Service.
COP8 is often referred to as the preferred approach where HMRC do not suspect tax fraud, for example, if they are challenging a technical point. COP9 is the preferred approach where tax fraud is suspected and HMRC have chosen to investigate on a civil basis rather than commencing a costly criminal investigation.
Latterly however, I have learned that it is not uncommon for HMRC to use COP8 rather than COP9, even where tax fraud is suspected because it means that the taxpayer will not benefit from the possible immunity from prosecution offered by COP9 and HMRC therefore still have the option of prosecuting the taxpayer should they wish to do so.
As the numbers suggest, few taxpayers have ever been under COP8 or COP9 investigation. It therefore follows that few (non-specialist) advisers have experience of COP8 and COP9 investigations. These investigations are very serious and engaging a tax dispute resolution specialist who carries out this work year on year is crucial.
Winning Tactics
- Engage a tax dispute resolution specialist to:
Prevent a sizeable tax bill, high percentage penalties, frozen bank accounts and criminal charges.
Increase the likelihood of reaching a favourable settlement with HMRC and of concluding the enquiry or investigation sooner than would otherwise be the case.
HMRC Campaigns
HMRC are issuing discovery assessments to approx. 9,000 taxpayers who failed to declare the loan charge in 2018/19.
In contrast to the relatively low COP8 and COP9 numbers, HMRC are issuing nudge letters left right and centre, often to taxpayers whose tax affairs are fully up to date. Here is a summary of what to look out for:
2,300 nudge letters are being issued to individuals considered persons of significant control at Companies’ House who are earning over £100k
5,500 nudge letters are being issued to offshore corporates owning UK property
Winning Tactics
- Unfortunately, HMRC still live in the age of hard copy post, so it is important to act fast if a nudge letter is received. This means contacting your accountant or tax adviser to notify them of the letter.
- Care needs to be taken when confirming that there is nothing to disclose because if this proves to be incorrect HMRC can come down harder when assessing penalties later.
- Do not ignore the letter, pay attention to deadlines, keep HMRC informed and engage a professional to check if there is a disclosure to make. Take care if you have telephone conversations with HMRC as they could misinterpret information, resulting in an unnecessary enquiry.
HMRC Disclosure Opportunities
In addition to the nudge campaigns referred to above, HMRC is also targeting users of Electronic Sales Suppression software. This is software specifically designed to supress turnover meaning that users deliberately report lower sales figures, resulting in a lower tax bill. There is a brief period between early December 2022 and 5 January 2023 during which taxpayers could notify their intention to make a disclosure to HMRC. Taxpayers then had until the 28 February (later extended to 9 April 2023) to make their disclosure, using HMRC’s new Electronic Sales Suppression Disclosure Opportunity.
I am doubtful that any tax irregularities in this area arose due to mere carelessness. I would therefore give serious consideration to requesting that HMRC deal with a case of this nature under COP9, which would mean making an application to the Contractual Disclosure Facility.
Winning Tactics
- The only way to stand a chance of restricting the scope of an HMRC investigation and paying only the tax that is properly due in cases of suspected tax fraud or deliberate behaviour in my opinion, is therefore to contact a tax dispute resolution expert such as myself without delay. We are not judgemental and are ready to assist any taxpayer who is ready to admit deliberate behaviour and pay the tax that it is due. Failure to do so could result in criminal prosecution.
- If you missed the 5 January deadline to notify an intention to disclose, don’t let that put you off notifying HMRC anyway through the usual means, but do engage or at least speak to a specialist before you do this.
