Robert Frost wrote of endings and beginnings that “there are no such things./ There are only middles”. This can feel particularly true of HMRC enquiries – which will often last for years, given that there is no statutory time limit for HMRC to complete an enquiry. 

This and the next three posts in our series of blogs on tax disputes in the UK cover key points and tips to help you get to grips with the different phases of an HMRC enquiry. Naturally, we will start with what to do when HMRC open an enquiry – or perhaps we should say “Enquiry”…

Is it an “enquiry” or an “Enquiry”?

Before engaging with HMRC, it is important to determine whether HMRC is merely making enquiries, or a formal “Enquiry” has been opened. This distinction is crucial because, unless HMRC has opened an “Enquiry”, they will not be able to issue a closure notice to charge additional tax. 

How do you know if an “Enquiry” has begun?

Check that HMRC has given you notice in writing. No particular form of notice is required, but the notice must (objectively) show HMRC’s intention to open a formal enquiry. 

Check your calendar. HMRC’s window for opening a formal enquiry is usually 12 months from the actual delivery of the tax return (if it was filed on or before the deadline). You must have received the notice before the last date on which a formal enquiry can be opened. It is not enough for a notice to be issued before the deadline. 

Check the addressee of the notice. An enquiry notice must be sent to the taxpayer at the correct address. It is not sufficient for the notice to be sent to your adviser or agent.

How do you proceed if HMRC has not issued a valid notice of “Enquiry”? 

You must take care to be consistent. If you proceed on the basis that the notice has been validly issued and received, and later assert the contrary, HMRC may be able to raise the defence of estoppel.

This does not mean that it is impossible for you to cooperate with HMRC where no formal enquiry has been validly opened. You can still cooperate, but you should expressly reserve the right to challenge the notice later. 

It is, of course, not advisable to ignore an enquiry notice because you think that it is invalid. 

Assuming HMRC have opened an “Enquiry”, is the scope fixed, or can they change it?

HMRC can change the scope once a formal enquiry into a particular tax return has been opened. They can look into any aspect of that tax return. 

What happens if HMRC misses the boat to open an enquiry?

HMRC can still assess tax (by issuing a “discovery assessment”) in relation to a “closed” year (i.e., once the enquiry deadline has passed), if they discover that there is an insufficiency of tax and either:

• the potential loss of tax was due to careless or deliberate behaviour by the taxpayer or their agent, or
• at the time the enquiry deadline passed, HMRC could not reasonably have been expected to be aware of the loss of tax.

What does it mean for HMRC to “discover” an insufficiency of tax?

No new information, fact or law is needed for there to be a discovery assessment, and a “discovery” is in practice a low bar. The same discovery can be made by more than one HMRC officer; there is no concept of the collective knowledge of HMRC. 

There are, however, limits. So-called “protective assessments” (made simply to avoid HMRC being out of time to raise an assessment) will not be valid. 

In Go City, the First-tier Tribunal (FTT) decided that assessments made on a “protective” basis to avoid the expiry of time limits were invalid. However, it is not enough simply to show that an assessment was labelled “protective”; the evidence must also show that no sufficient discovery had been made to ground the assessment. In Go City, the FTT found that HMRC had not, at the time of the “protective” assessment, formed the requisite view that the taxpayer's returns were inaccurate. Had they done so, it would not have mattered that the assessment was in nature “protective”: it would be valid. 

What can you expect as the enquiry progresses?

As we noted at the start of this post, there are no time limits for HMRC to complete an enquiry and, in practice, enquiries can continue for a number of years. During this time, HMRC will largely focus on gathering information – so, we will also focus on HMRC’s information gathering powers in our next blog post in the tax disputes series.

How we can help…

Please get in touch with any of us or another member of Slaughter and May’s market-leading tax disputes team if you have any questions on the topics discussed in this blog or another tax disputes query. 

We have extensive experience in advising at every stage of a wide range of disputes from questions of UK corporation tax, partnership taxation and VAT grouping to treaty interpretation and transfer pricing. Whether you are looking for strategic advice in respect of an ongoing issue or proactive risk management through the creation of defence files or an audit of existing processes, we can help.