How have HMRC Enquiries Changed?

HMRC enquiries in the past

Many years ago, HM Revenue & Customs (HMRC) started HMRC enquiries by agreeing a date and time for a visit and then arriving with a blank questionnaire. They would then interview the main directors/ shareholders and review a sample of business records to try to find any potential errors.

Tax enquiries were usually full enquiries often based on a reduction in sales/ turnover or a sudden rise in expenses. With the change to Self-Assessment in the mid 1990s, HMRC knew they would only have ‘one bite of the cherry’ so full HMRC enquiries were often the standard approach rather than smaller aspect enquiries.

HMRC often adopted a ‘trial and error’ approach, targeting business arbitrarily with a large number of enquiries completed as satisfactory with no additional liabilities.

HMRC enquiries of today

In recent years HMRC has become far more sophisticated in its approach. In 2009 HMRC introduced Connect, a state of the art analytical software which HMRC use to determine who should be subject to an enquiry.  The Connect system quickly compares the information declared on tax returns against this enormous data warehouse and determines whether an enquiry is appropriate. At the beginning of the year, it was announced that HMRC would use the ‘Connect computer system’ to review details of individuals and businesses to cross check that they are declaring and paying the correct amount of tax and National Insurance to the Government.

What is the impact of this change?

With this system now established, we have seen its impact at Vantage, with a change in the profile of claims made as a result of HMRC activity. More specifically:

• VAT visits and VAT repayment checks have jumped from 25% of all Vantage Fee Protect claims to 45% with the accountancy fees rising by 25% as HMRC have access to more information to check. This rise in VAT work has been matched by a decline in Self-Assessment – Aspect enquiries and Simple interventions. These have dropped from 50% to 33% of our claims but the accountancy fees have risen by nearly 70% on Aspect enquiries alone. Clearly HMRC have more information to work through and rather than target one issue, they can target a number of issues.
• SA Full enquiries have risen by 15% with the fees rising by 40% highlighting that HMRC have more information to explore.
• Corporation Tax enquiries (both Full and Aspect) have remained fairly constant although the fees on Aspect enquiries are up nearly 75%. It would seem that HMRC have a better understanding of the business before the enquiry starts.
• PAYE/ Construction Industry Scheme reviews have nearly doubled in 12 months although fees are down nearly 50%. However, this is one area that HMRC “police” with employers/ contractors receiving a visit on average every 5-6 years, so these visits will continue.
• Cross Tax enquiries (usually covering Corporation Tax/ VAT and PAYE) only account for 1% of the enquiries with fees dropping by 15%.

In summary, it is clear that HMRC are starting more enquiries and the fees for this work are increasing as HMRC have more potential avenues of enquiry. This use of multiple data sources can highlight potential discrepancies even before the HMRC enquiry/ visit has started. On many occasions accountants haven’t been supplied with this information (by their client) and discrepancies are only discovered at the enquiry/ visit.

Against this back drop the value of having Tax Fee Protection Insurance has never been greater, which at a relatively low cost provides peace of mind against this increasingly sophisticated risk. Vantage Fee Protect Tax Fee Protection Insurance protects against accountancy fees incurred dealing with an HMRC enquiry.