Insights

Research into the numbers of new HMRC tax enquiries being opened is showing a significant increase. There are now over 250,000 open tax enquiries, which means more than 250,000 people are having their tax affairs scrutinised by HMRC.

In the 2021/22 tax year, 232,000 tax enquiries into individuals or businesses were recorded, rising to 248,000 in the 2022/23 tax year.

Why are tax enquiries opened?

Generally, a tax enquiry is launched when HMRC believes that a taxpayer’s filing records or payments are incorrect. The likelihood of facing an enquiry tends to increase in certain circumstances, such as a taxpayer’s involvement in an industry sector known for cash payments, where the taxpayer’s tax return has been filed late, where suspicions about the amount of income or gains declared are raised, or because of a tip off. Tax returns containing mistakes are also likely to ring alarm bells and attract unwanted attention.

What are the tax enquiry penalties?

HMRC expects taxpayers to take all due precautions to ensure they do not make mistakes on their tax return, whether deliberate or genuine errors. This means either making sure you are personally up to date with the regulations or are employing a tax adviser to ensure your tax affairs are properly managed. The penalties imposed for mistakes on tax returns can be up to 30% of the tax owed for careless errors and up to 100% if the error is considered by HMRC to be deliberate in nature. For mistakes or deliberate errors relating to offshore assets, the penalty can rise to 200% of the total owed.

Given that the number of tax enquiries is rising, it’s really important to ensure that your tax returns are correct and submitted on time. In a similar way to charging penalties for late filing, raising enquiries is a good way for HMRC to increase tax revenues.

How does HMRC detect errors on tax returns?

HMRC also uses specialist software, Connect, which collects large amounts of data which is assimilated with other intelligence to draw a picture of a taxpayer’s profile which is then checked against their declared income and gains. The software connects to Companies House, Land Registry, DWP, Border Force, banks, insurance companies, reported legal cases, internet, newspapers and investigative journalist media amongst others. HMRC also receives large amounts of data from overseas tax authorities on UK tax resident taxpayers

Where data collected shows anomalies with what has been declared, a taxpayer is likely to be flagged and targeted.

Understand your obligations as a tax payer

Therefore it is very important to stay up to date with tax compliance and also, make sure you keep detailed records of all transactions, proof of income and expenditure and always declare capital gains within the required timeframes. It is also important to ensure that if you have multiple income streams, e.g. a rental property, a side hustle or receive dividend payments from shares, that you are declaring all your income. It can be complicated when accounting for different types of income on a tax return and it is easy to make mistakes if you don’t know how the different rates and allowances are calculated.

Currently, interest rates are higher than they have been in decades and together with allowances being frozen, many people are having to complete a self-assessment tax return for the first time.

If HMRC opens an enquiry they may want to check historical records dating back many years and it can be extremely stressful for the taxpayer involved. One good option to consider is taking out specialist insurance against HMRC tax enquiries, which will cover the professional fees associated with getting advice and possible tribunal representation.

To get proactive tax planning advice or support for your tax compliance please email us at partners@rjp.co.uk.