Tax enforcement in the United Kingdom
We have written about UK taxes before -
1. Developments in the Provision of Private Client and Offshore services in the UK - https://www.mooresrowland.tax/2019/10/developments-in-provision-of-private.html
3. Does a UK Tax Resident need to pay tax on Foreign Investment Income? -
4. Tax Considerations for Foreigners Investing in UK Real Estate
5. Making Tax Payments to HMRC
6. Tax Planning for UK Investments - Stamp Duty
Now let's talk about enforcement.
How does the tax authority verify compliance with the tax laws and ensure timely payment of taxes? What is the typical procedure for the tax authority to review a tax return and how long does the review last?
The UK tax system is fundamentally a self-assessment system: generally, individuals and companies are required to self-assess their liability to tax and file a return with HMRC stating their tax liability for the particular period in question.
HMRC is able to open an enquiry into a self-assessment return within 12 months of it being filed. HMRC may open such an enquiry without giving any justification for doing so, and the enquiry can be into any aspect of the return. On opening an enquiry, HMRC typically sets out the specific issues that it wishes to enquire into. HMRC is not bound by the contents of the initial enquiry notice, and may narrow or expand the scope of its enquiry at any time.
There is no legislative deadline by which time HMRC must have completed its enquiry but, where an enquiry takes an unduly long time, taxpayers are able to apply to a tribunal for a direction that HMRC closes the enquiry.
Once HMRC closes an enquiry (using a closure notice), recent case law suggests that the matters that can then subsequently be disputed in relation to the particular return are limited to what is referred to in the closure notice.
HMRC does not enquire into every self-assessment return that it receives, instead choosing which returns to enquire into based on risk factors, such as the taxpayer’s size, record of compliance, use of tax avoidance schemes and involvement in cross-border transactions. In any event, the taxpayer itself is under an obligation to retain all records and documents that were required in order to produce a full and accurate tax return for, generally, a minimum of six years.
Are different types of taxpayers subject to different reporting requirements? Can they be subjected to different types of review?
Individuals and companies are required to self-assess their liability to tax and file a return with HMRC, stating their tax liability for the return period. The period in relation to which the individual or company is required to compute their tax liability will depend on the tax in question and the nature of the taxpayer. For example, companies compute their income tax liability by reference to accounting periods that are 12 months in duration, and are required to file their tax return within 12 months of the end of the accounting period in question. VAT liability is typically computed quarterly.
Both individuals and companies may have to make payments on account to HMRC.
HMRC’s ability to open an enquiry into a tax return or issue a ‘discovery’ assessment applies equally to individuals and companies. The duration of any enquiry will generally depend on the complexity of the taxpayer’s affairs.
What types of information may the tax authority request from taxpayers? Can the tax authority interview the taxpayer or the taxpayer’s employees? If so, are there any restrictions?
HMRC has formal powers to request information from taxpayers, but also commonly requests information informally. Formally, subject to restrictions in the case of information or documents subject to legal professional privilege (LPP) (see question 7), and to a limited right to appeal, HMRC has the power to require a taxpayer to provide information or to produce a document if the information or document is reasonably required by HMRC for the purpose of checking the taxpayer’s tax position. HMRC can also require a third party to provide information or produce documents in relation to a taxpayer’s tax affairs if that information or document is reasonably required to check the taxpayer’s tax position. In both cases, HMRC cannot require anyone to produce a document that is not in their possession or power (but note the record-keeping obligation described above).
HMRC may also inspect a taxpayer’s business premises and other property in the exercise of its functions.
Although HMRC’s formal powers to interview taxpayers and the employees of taxpayers are generally triggered only in cases of fraud or criminal investigations, in practice, it is quite common for HMRC to informally request such interviews.
What actions may the agencies take if the taxpayer does not provide the required information?
Failure to comply with a formal information request from HMRC can result in penalties (see questions 11, 12 and 13). Criminal consequences may arise in cases of concealment of information or fraud.
Collecting overdue payments
How may the tax authority collect overdue tax payments following a tax review?
HMRC has a wide range of enforcement options available to it, including:
Legislation was introduced in 2015 that allows HMRC to collect tax due to it directly from taxpayers’ bank accounts in the UK provided that the sum that HMRC seeks to collect exceeds £1,000. This is intended to be a measure of last resort.
In what circumstances may the tax authority impose penalties?
Generally, HMRC may impose penalties for:
There are also distinct penalty regimes relating to failure to comply with HMRC information requests and for the promotion or use of tax-avoidance schemes.
How are penalties calculated?
Penalties for inaccuracies in tax returns and documents and for failures to notify HMRC of a liability to tax are often described as ‘tax-geared’ penalties, meaning that they are calculated as a percentage of the tax that is due. The amount of the percentage will depend on whether the inaccuracy or failure was careless, deliberate, or deliberate and concealed and also whether the discovery of the increased liability to tax was voluntarily disclosed to HMRC or not.
Penalties for a failure to file a return or pay tax on time differ depending on the tax to which the failure relates. These penalties often start as requirements to pay fixed amounts, but can become fixed daily penalties or tax-geared penalties, depending on the nature and length of time for which the failure continues.
Penalties for failure to comply with HMRC information requests start as a requirement to pay a fixed amount, with a variable daily default penalty. Tax-geared penalties will apply in cases of continued failure to comply.
The raising of penalties is subject to review by HMRC’s Penalty Consistency Panel.
What defences are available if penalties are imposed?
Penalties for a non-deliberate failure should generally not apply if there is a reasonable excuse for the failure. HMRC takes a restrictive view on what amounts to a reasonable excuse, with not having enough money to pay the tax generally not being sufficient. Reliance on an agent (such as accountants or lawyers) may be a reasonable excuse, or, more likely, indicates that the taxpayer has taken reasonable care.
Penalties may be suspended in situations where the failure is a ‘one-off’.
Are there criminal consequences that can arise as a result of a tax review? Are these different for different types of taxpayers?
Criminal consequences will generally require fraudulent or dishonest conduct by the taxpayer. Where HMRC suspects a person of acting fraudulently, it has certain criminal investigation powers that go beyond its usual powers.
Traditionally, corporates were generally only criminally liable for the actions of their employees and other associated persons if the controlling mind of the corporate is proved to have been involved in the relevant criminal behaviour. However in 2017, following recent global tax scandals, the UK government introduced a new strict-liability, US-style approach, where the burden is on corporates to demonstrate that appropriate prevention procedures were in place in order to avoid a criminal charge of ‘failing to prevent’ a tax-related crime committed by someone else.
The consequences of being found guilty of a tax-related crime depend on the taxpayer involved. For individual taxpayers and for the directors of corporations, fines and prison sentences are available. For the corporations themselves, fines are available.
What is the recent enforcement record of the authorities?
The majority of tax disputes are resolved before proceeding to the tribunal, with one or other party conceding, or reaching a compromise settlement (which, to comply with HMRC’s Litigation and Settlement Strategy, must be a technically justified outcome). In those cases that do proceed to court, HMRC’s enforcement record is good, particularly in cases involving perceived tax avoidance. In 2018/19, the First-tier Tribunal ruled in HMRC’s favour in 75 per cent of the tax disputes that it heard.