Compliance checks and formal enquiries

What a compliance check is

A compliance check is HMRC examining whether a return is correct. It can be opened into a Self Assessment return under Section 9A of the Taxes Management Act 1970, or into a Company Tax Return under Paragraph 24 of Schedule 18 to the Finance Act 1998.

A check usually starts with a compliance check letter. HMRC carries out some checks by telephone, and if it phones you can ask it to write instead. The letter will normally name the return and period under enquiry, set out what HMRC wants, and come with one of HMRC’s compliance check factsheets explaining the process and your rights. HMRC says it will tell you what it wants to check and why. What the letter will not normally tell you is how your return came to be selected, or how wide the officer intends to go.

Where HMRC believes there may be a significant loss of tax, its Fraud Investigation Service can take over a check started elsewhere in HMRC, or open its own, and run it as a Code of Practice 8 investigation.

What triggers an HMRC compliance check?

HMRC says it has the right to check whether any tax return is accurate and complete. It also gives examples of things that may prompt a check: figures on a return that seem wrong, a large VAT repayment claim from a business with a low turnover, or a small amount of tax declared on a high turnover.

Behind those examples sits a risk-based approach. HMRC’s internal guidance says most enquiries are risk-based selections, and that its Risk and Intelligence Service plays a key role in identifying cases. In practice a risk often comes from comparing a return with other information HMRC holds or can find:

• Information from third parties. HMRC’s own complaints guidance says third-party information may often trigger a compliance check. That includes information passed on by other government agencies.
• Publicly available material. HMRC’s guidance describes internet research as a risk assessment tool, used when cases for checks are being developed. HMRC says it may look at information anyone can see, including news reports, websites, Companies House and Land Registry records, and social media without privacy settings.
• Reports from the public. What HMRC does with a report is covered in our guide to the signs that HMRC is looking at your tax affairs.

Some checks have nothing to do with risk. HMRC’s guidance says a very small proportion of Self Assessment returns are taken up for a full enquiry entirely at random, to measure how accurate returns are across the system, and it tells officers to handle those cases exactly like any other. A letter will not say that a return was picked at random, and being checked is not, in itself, a finding that anything is wrong.

Does HMRC check all Self Assessment returns?

Not in the sense of opening an enquiry into each one. HMRC can open an enquiry into any return within the time the legislation allows, set out below, but most enquiries follow a risk assessment, and only a very small proportion are random.

If HMRC opens no enquiry within that window, the return generally becomes final. HMRC can still go back later through a discovery assessment, but only in defined circumstances: broadly, where a loss of tax was caused carelessly or deliberately, or where the return did not give HMRC enough information to show it was wrong. A return that has not been questioned is therefore not the same as a return HMRC has approved.

Aspect enquiries and full enquiries

HMRC has traditionally labelled its enquiries internally as either “full”, covering the return as a whole, or “aspect”, concentrating on one or more matters within it. A full enquiry is meant to address all the significant risks in a return, with a comprehensive review of the underlying records. For a business, that can extend to the private finances of the owner or directors.

The labels have no legal force. HMRC’s own guidance says every enquiry is legally an enquiry into the whole return, unless it is limited to an amendment, and tells officers not to use either term with taxpayers or their agents. A letter that asks about one figure does not confine HMRC to that figure, and HMRC’s guidance accepts that an aspect enquiry can develop into a full one. That is the main reason to answer precisely what was asked.

The enquiry window

A formal enquiry starts only when HMRC gives a notice of enquiry within the time the legislation allows. For a Self Assessment return, Section 9A sets that window:

• Return delivered on or before the filing date: the notice of enquiry must be given within 12 months after the day the return was delivered.
• Return delivered late: up to and including the quarter day (31 January, 30 April, 31 July or 31 October) next following the first anniversary of the day it was delivered.
• Return amended by you: up to and including the quarter day next following the first anniversary of the amendment. If that notice is given after the window for the original return has closed, the enquiry is limited to matters the amendment relates to or affects.

A return can receive only one notice of enquiry, apart from a further notice following an amendment. Company returns follow the same pattern under Paragraph 24 of Schedule 18, except that for a company in a group that is not a small group, the 12 months run from the filing date rather than the day of delivery. Once the window has closed, HMRC cannot open an enquiry into that return; to go back further it generally has to rely on a discovery assessment, which has its own statutory conditions.

How long does an HMRC compliance check take?

There is no fixed time limit. How long a check takes depends on what is being checked, how complex the records are and how quickly information passes between you and HMRC, and we will not put a figure on a particular check before seeing it.

A formal enquiry stays open until HMRC issues a closure notice stating its conclusions and any amendment to the return. HMRC can also close individual matters earlier with a partial closure notice. HMRC says that if a check shows nothing is wrong it will end it as quickly as possible, and its own guidance tells officers to close a case immediately once an acceptable explanation emerges.

If you think a check should already have ended, HMRC asks you first to tell it why. If that does not resolve it, you can apply to the tribunal for a direction requiring HMRC to issue a closure notice, for the whole enquiry or a particular matter, within a specified period. For individuals and trustees the power is in section 28A of the Taxes Management Act 1970; for companies, paragraph 33 of Schedule 18 to the Finance Act 1998. The tribunal must give the direction unless it is satisfied that HMRC has reasonable grounds for not closing the enquiry within that period.

A direction does not decide the tax. It requires HMRC to state its conclusions, which can then be appealed in the usual way; our guide to appealing an HMRC decision explains how.

What we do

• Establish what the letter is and which statutory footing it sits on
• Confirm the real deadline and, where appropriate, seek more time before it bites
• Take over the correspondence, so nothing reaches HMRC undrafted
• Establish what the records actually show before responding substantively
• Answer what was asked, and say so when a request falls outside the enquiry
• Manage the matter through to a closure notice, including any penalty position

Schedule 36 information notices

Where HMRC issues a formal information notice under Schedule 36 to the Finance Act 2008, it is a statutory requirement rather than a request, and penalties can follow non-compliance: £300 at first, then up to £60 a day while the failure continues. Some information notices carry appeal rights: a notice to the taxpayer can generally be appealed within 30 days of the date it is given, but not so far as it requires statutory records (the records tax law requires you to keep), and not at all if the tribunal approved it. The scope of what is reasonably required can sometimes be narrowed too. Both are time-limited, so the notice needs reading properly on arrival rather than filed to deal with later.

There is also a protection once a return has been filed. A notice to the taxpayer about the income tax, capital gains tax or corporation tax position for that period generally needs an open enquiry, or a reason to suspect that tax has been under-assessed, unless the information is also needed to check another tax. Our guide to HMRC information notices under Schedule 36 explains what a notice can require, what is protected and how to appeal.

Company enquiries travel

A corporation tax enquiry rarely stays about corporation tax. Once HMRC opens a check on a company return, the questions tend to reach the directors: loans to participators, dividends drawn against profits, benefits, PAYE treatment and VAT.

Those normally sit with different advisers, or with nobody. Where a company and its directors both have exposure, the positions need to be considered together rather than answered separately. Our pages on PAYE and employer compliance reviews and VAT investigations cover those checks in their own right.

Nudge letters are not enquiries

A “one to many” nudge letter invites you to review your position. It is not a formal enquiry and no statutory enquiry period has begun. That does not make it safe to ignore: how you respond, or whether you respond at all, can shape whether a formal enquiry follows. If you are not certain which you have received, our letter identification guide sets out the differences.

Further reading

• Is HMRC looking at your tax affairs? Signs, triggers and what to do
• HMRC information notices under Schedule 36
• How to appeal an HMRC decision: review, ADR and the tribunal
• Nudge letters and the certificate of tax position
• How far back can HMRC investigate?