Your Investigation: Endgame
Can I force the investigation to end? What do I need to know about penalties? What is scaling back? You’ve got questions, let’s go to work.
Can I force the investigation to end?
If you feel that an investigation has gone on for a long time you can apply to the Tribunal and request that HMRC end the investigation.
HMRC will have to justify keeping the case open. If HMRC are keeping the case open without good reason, the likelihood is that the Tribunal will give a deadline for the case to end.
There are two broad schools of thought on this: first, forcing an investigator to close a case prematurely may result in higher assessments as you have less time to establish your innocence. The second school of thought is that the longer the case is open the more HMRC ‘fishing’ will take place and the greater the pressure on the investigator to bring in a catch, so it’s best to close the case ASAP.
Make it clear to the investigator that if their closing assessments are unreasonable you won’t hesitate to appeal to the Tribunal and complain.
More about Tax Tribunals and how to apply:
Detailed Guidance and an application to close enquiry:
What do I need to know about penalties?
In April 2009 HMRC introduced a new (and tougher) system of penalties. The new regime is complex, but this is the starting point.
Do note that each percentage point is preceded by “Up to” so it’s a ceiling rather than a target. HMRC will say that you’ve been careless so that’s a 30 percent penalty, but you can mitigate that (make it smaller) by saying, “well I wasn’t really very careless and it’s just for small amounts of money, so you can’t justify 30 percent”.
No penalties apply if “reasonable care” has been taken. HMRC will take the line that if you had taken reasonable care you wouldn’t have made a mistake / error in the first place.
You can take the line that you did everything in your power to keep proper records and make accurate self assessment returns, but the system was much more complex than you expected.
To which HMRC will say, that you should have got an accountant to help you then. To which you can then argue that there is no legal requirement to have an accountant and HMRC have historically told everybody how easy it is to do a return (“Tax Needn’t Be Taxing”). It was on that assumption that you decided to make the return on your own.
If you’ve used an accountant and there have been errors it’s still your responsibility, but you can argue that you went to a third party to get advice and help and you – reasonably – acted on that information.
The bar chart shows the penalty bands. It’s up to 30% for “careless behaviour”. So once again we get this word careless. It’s used casually in the real world, but it has a very different meaning in the world of HMRC and you can see here that it carries a substantial penalty.
Up to 70% for “deliberate mistakes”: When HMRC say “deliberate mistakes” what they mean is fraud. So you earned money but didn’t declare it when you knew you should have.
Up to 100% for “deliberate and concealed mistakes”: This means that not only did you know you were doing wrong but you’ve made things difficult for HMRC along the way too, so they are really going to chuck the book at you.
Even though things have toughened up on the penalty front there is still plenty of room for negotiation.
Also, if HMRC are demanding penalties in earlier years (before the system was toughened up in April 2009), that section of the penalties should be reduced as they fall under the old – less harsh – system.
Confused yet? Well it is complex, but it all comes down to a bit of haggling: HMRC will stick on a penalty of X% because of A, B and C and you have to argue your side. HMRC will be expecting this, and when they ‘stack’ their penalty demands they do so with future haggling in mind.
If you are being hit for a high percentage as a penalty and HMRC won’t budge, you might want to take your case to an ADR or the Tribunal. Sometimes just threatening HMRC with the Tribunal is enough to make them take a more sensible position.
After closure notices are issued you will have 30 days to appeal. If you accept the HMRC figures they will become binding to all parties. If you appeal HMRC can revise the ‘final’ figures.
In my case the closure notices were for just over £6k. When I appealed HMRC doubled that figure to an eye watering £12k (just to put the scarers on me) then (after a year of negotiation and a month before the appeal hearing was due to take place) HMRC reduced their figure to just over £4k. That should give you an idea of how elastic these figures can be.
What is scaling back?
After years of protracted negotiation HMRC will offer a settlement figure.
You will initially want to accept this – anything to bring the investigation to an end! But you need to make sure that this settlement figure is the full and final figure.
Sometimes this figure is not what it appears to be, it’s just the tip of the iceberg and if you agree to it you will find yourself slipping into some very icy water.
HMRC will “scale” a settlement figure back over at least four years – making the assumption that what you have done in one year you have done in others. They will then add penalties and interest.
Let’s say you agree to a tax shortfall of £3k – Scale that back over four years and you get £12k. Then there is interest (increasing the figure to well over £15k) and let’s not forget about penalties – HMRC may go for around 50 percent depending on how they feel you have behaved.
So what starts out as £3k soon becomes more like £20k. And once you’ve admitted liability for the £3k there is little you can do.
The only way out is to go to the internal review or a Tribunal and argue that the circumstances in earlier years were radically different to the enquiry year and that’s a road to avoid if you possibly can.
In short scaling back is a process by which you will end up being given a final bill, which is much bigger than you anticipated.