Corporate Crime & Investigations: HMRC Tax Enquiry

Neil Donovan:

Hello and welcome to this Corporate Crime and Investigations podcast from Ashurst. My name is Neil Donovan. I'm a partner in the Corporate Crime and Investigations team in London, and I'm delighted to be joined today by Sophie. Sophie's counsel in our London tax team. Hi, Sophie.

Sophie Suri:

Hello, Neil.

Neil Donovan:

So we're seeing through both of our practices a real increased focus on investigations and enforcement by HMRC, the UK Tax Authority. And this really reflects a trend we've been seeing globally in terms of increased scrutiny from tax authorities. Today we're going to focus on a specific aspect of HMRC enquiries. But Sophie, before we do that, perhaps you could just tell us what you think is driving this increased scrutiny by tax authorities.

Sophie Suri:

It's, I think, a confluence of a number of factors coming together. And it's certainly the case that governments are under increased pressure to collect the tax that is owed from their taxpayers. And we're seeing that on a global basis. And I think there's a wider cultural context following the Panama Papers. There's both pressure from the public and the media and politicians on governments to demonstrate that they are using all efforts available to them to collect tax that is owed by taxpayers.

And I think one of the phrases that we hear frequently in the media is this concept of the "tax gap." And that is the difference between the tax that is owed and the tax that is actually collected by a tax collection agency. And what is really appealing about narrowing the tax gap is that it doesn't require politicians to make unpopular decisions in terms of collecting additional revenue by raising taxes on their taxpaying population. Instead, what they can do is raise their tax revenues by using the existing laws in place, but simply collecting more efficiently and making sure that there is increased compliance amongst the population of taxpayers.

So one way of doing that is by accurately identifying where taxpayers maybe haven't sufficiently paid all tax that is owed, and that could be due to errors or deliberate behaviour in filing their tax returns. And so tax authorities globally are using their powers to try and challenge taxpayers in respect of their tax returns or their tax positions that have been taken. So that's one factor.

Another is that we've seen legislative change over the last decade or so, particularly in the area of tax information sharing. And you might have heard of a number of international automatic tax information exchange regimes. So that might include FATCA, the Common Reporting Standard, country by country reporting, DAC6, the mandatory disclosure regime. And so that's a large range of those types of pieces of legislation, all of which are aimed at increasing tax transparency on a cross-border basis and ensuring that tax authorities in different jurisdictions are exchanging information about taxpayers. So tax authorities now have more data than ever to use at their disposal to understand how taxpayers are operating cross-border, and where there might be potential for tax avoidance or tax that should have been collected that hasn't been declared.

And on top of that, we've had reams of legislation making tax a little bit more complex. The OECD's Base Erosion and Profit Shifting project, which started in 2015 in earnest, also represented an international response to tax avoidance, and particularly that used by multinational companies on a cross-border basis to shift profits away from higher tax jurisdictions to low tax jurisdictions. And so that project in itself shows how there's been an international response to try to combat those sorts of behaviours.

But the introduction of the OECD BEPS measures themselves has introduced a lot of complexity into tax regimes. So legislation such as the hybrids regime and interest deductibility and Pillar Two legislation has meant that taxpayers have had a lot more compliance to grapple with—very difficult rules to grapple with. And where there's complexity, there's often room for more error. And so in turn, that gives more scope for tax authorities to investigate and look into the positions that taxpayers are taking in response to some quite complex legislation.

Neil Donovan:

Just briefly to come in there actually on the OECD—really interesting to see how they are driving standards in the tax environment or tax context. They've been very influential. And their standards—they're setting expectations and standards in, for example, the anti-bribery and corruption world, and their principles are very much viewed as an overarching benchmark in terms of ABC compliance. So that role of the international organisations is something we see across different aspects of financial crime as well.

Sophie Suri:

Yes, I think that's a great point. And the response has been really interesting because I think when the BEPS projects were first announced, plenty of tax practitioners globally thought, "Well, to what extent is this really going to be picked up? Or are jurisdictions really going to engage with this?" And they have. It's been a huge success story. And that's why so many jurisdictions have now implemented legislation on that basis. And taxpayers are having to deal with some very complex rules. But you're right that the OECD has been incredibly influential in this space.

Neil Donovan:

And I think you've also seen a real increase in funding and resources for authorities.

Sophie Suri:

Yes, that's right. So another factor has been the increased funding that tax authorities have received on a global basis, but including HMRC, to assist them in collecting additional tax to narrow that tax gap. I think, for example, in the 2024 budget—and this was further announced with more details in the 2025 spending review—HMRC received an additional £1.7 billion in funding. And that was a package that's aimed at ensuring that they've got the resource to narrow that tax gap by way of increasing HMRC's use of digital resources—so using sophisticated data tools and AI to assist with tax collection—but also to fund over 5,000 additional compliance staff over the next five years. And that's expected to collect a very significant additional amount of revenue. We'll see whether that transpires.

But the UK is by no means the only jurisdiction that's been providing additional funding to their tax authorities. And as I mentioned, the UK is using these sophisticated data tools—or starting to put them in place—to digitalise their tax collection system. And that's happening as well across the globe, so that tax authorities are able to verify information filed against banking records, property ownership and online activity to help tax authorities spot anything unusual.

And the final thing I wanted to mention is the new HMRC strengthened reward scheme for whistleblowers who report serious tax avoidance or evasion cases. I know you've been looking at this closely.

Neil Donovan:

This is a very interesting development. I think for anyone practising in the corporate crime space, rewarding whistleblowers and incentivising whistleblowers is a particularly hot topic at the moment. It's a real priority area for a number of regulators and law enforcement agencies globally, really calling for reforms to existing whistleblowing regimes and adopting the type of incentivisation and reward programmes that we've seen deployed so successfully in the US.

But this new HMRC strengthened reward scheme was announced in the budget just a couple of weeks ago. And the way it will operate is that whistleblowers who report serious tax avoidance or evasion will be offered a percentage of the tax recovered. And that may be between 15 and 30 percent of the additional tax collected. So in a large recovery, it could be a very significant payment to the whistleblower. And this is modelled on the US Internal Revenue Service programme. And it's all about intelligence and trying to incentivise credible and actionable intelligence that leads to significant tax collections and narrows that tax gap, as you mentioned.

There's no upper limit on the reward amount, which again is significant. That does mean there could be potentially multi-million pound payments in significant cases.
So what does this mean? Of course, you've been talking about detection and the investment that authorities are making in terms of their data analytics and identifying tax evasion. This is another detection mechanism. I think rewarding whistleblowers means people are more likely to come forward with concerns, and I think it will prove to be a very effective intelligence channel for HMRC.

So we'll certainly be keeping an eye on this looking forward. And as I've mentioned, rewarding whistleblowers is something that's a very live topic, not just in the tax space but other areas of financial crime as well.

Moving back though to HMRC enquiries—we're in the thick of enquiry season—so could you just tell us, Sophie, what an HMRC enquiry is? What does it involve and mean for companies?

Sophie Suri:

So an enquiry, which can be opened on companies or individuals—any form of taxpayer—is a statutory process and an important part of HMRC's powers to investigate taxpayers' affairs and to ensure accuracy and compliance. So when HMRC issues a formal enquiry notice to a taxpayer, it means that, in effect, HMRC have reopened that taxpayer's tax return and are investigating it, with the possibility of assessing that taxpayer to additional tax in respect of that period—so that financial year in respect of which the tax return has been filed.

And of course, to the extent that the taxpayer satisfies HMRC in their enquiries that they make during the process, then it may be that HMRC issue what's called a "closure notice" to signify that they're satisfied—no further questions and the tax return can remain as it was filed.

But alternatively, it may be that HMRC discover that there hasn't been sufficient tax paid during the course of their enquiry, in which case they will issue what's called an "assessment." And if the taxpayer appeals and doesn't just settle that tax at that point, then we are progressing to what we would consider an HMRC dispute, which can end up in the Tax Tribunal to the extent that it's not settled outside of the tribunal, including through any alternative dispute resolution method.

But the enquiries are then potentially the first stage of a dispute. Or it could be quite an ordinary course type of enquiry that can be shut down quite quickly. And so it can take a long course or it can be a fairly quick, swift matter to resolve.

And HMRC has broad powers to open an enquiry. It can do so into every tax return that it receives, and it doesn't have to provide specific reasons for opening an enquiry or to establish any particular error. But there are time limitations on HMRC's powers. It must open an enquiry within a twelve-month window from the date that the tax return was filed.

And that's why when you mentioned this "enquiry season," what we tend to see is HMRC issuing a flurry of enquiry notices around the sort of December/January period because of the tax return deadlines for self-assessment and for companies as well that are filing their tax returns around December and the end of January. And that means that HMRC might be making sure that they're within that timeframe—either using automated systems or culturally within HMRC, this is the time that they think "We're about to run out of time. Let's make sure we've opened everything that we should be" to protect their position.

Neil Donovan:

Not the most welcome Christmas gift.

Sophie Suri:

No, quite. And we have a number of clients who've been dealing with this over the Christmas period. Quite often HMRC, in their enquiry notice, will be setting a deadline for response, and that can be quite challenging over a period where a number of your staff are not present to assist in responding to that.

But it's important to remember that in the enquiry notice, that deadline is something that has been set by HMRC. It's not statutory. So you can respond and say, "Look, you've given me a deadline right over the Christmas period. We don't have everyone here that needs to help respond to this. Can we just have an open conversation about extending that deadline?"

And as I've said, it may be that some of these enquiries are slightly spurious, particularly if they've been opened using automated reminders by HMRC that they're about to run out of time—this is a good opportunity to open it. But it might be that HMRC is actually using publicly available information to open an enquiry in a more targeted way.

So we've seen some examples of HMRC having looked at the accounts of a business on Companies House and using that information to prompt them to open an enquiry. Or it could be that there's been an announcement in the press in respect of a deal that's closed and HMRC are looking at that in conjunction with the tax return they've received and decide to ask some questions about it.

So it's not necessarily the case that we can assume that just because an enquiry is received now towards the end of the deadline, that it's an automated process. It may be that HMRC are looking for something quite specific and are using information to quite carefully consider who they should be opening an enquiry into.

Neil Donovan:

So once you receive an enquiry letter from HMRC, what does the taxpayer need to be mindful of in terms of responding to that?

Sophie Suri:

So it's a great question. And the number one thing to look for is the validity of that enquiry notice. Is HMRC within the applicable time limit? You'd be surprised how often actually that might not be the case. And also, who is it addressed to? Is it addressed to the correct entity? So check the entity names, company numbers, etc., and just make sure there's complete clarity on which entity is being asked for what information.

And I say that because usually the first enquiry notice will be letting the taxpayer know that an enquiry has been opened, but it will also be asking for information from the taxpayer. And so typically, we'll see a list appended to the enquiry notice with a list of requests from HMRC for further information.

And what we say is that at this stage, those requests are made on an informal basis. And what we mean by that is that HMRC is not using statutory powers to oblige the taxpayer by law to provide that information. It's a request that the taxpayer can say no to legally at this point.

HMRC does have statutory powers to require information to be provided, known as "Schedule 36 notices." And those might come about later during the course of an enquiry. But usually at the first stage, we're seeing an informal request.

And the taxpayer should also be quite careful in responding to those information requests. And obviously, I think it's a good thing to set the right tone of relationship with HMRC and being open and transparent and compliant with the course of the enquiry. But equally hand in hand with that, making sure that you're not tripping up over other areas in responding to information requests without thinking through some quite important areas of law is important. So get your legal advisers involved early on in the process is what we would advise.

And in particular, some areas to look out for:

• First, legal professional privilege. Be mindful not to inadvertently waive privilege by responding to information requests, as HMRC don't have the powers to require a taxpayer to provide legally privileged information. By way of reminder, a document will be subject to legal professional privilege if it forms confidential communications between taxpayers and their lawyers made for the dominant purpose of providing legal advice.
• Secondly, confidentiality. HMRC may have asked for certain documents that have confidentiality clauses in them, and there may be third parties that are subject to those documents. Shareholders agreements are a very common example of that, and any other third party contracts. And taxpayers should just be aware of whether they are permitted to provide the documents to HMRC under the terms of that confidentiality clause.

It's quite common to see them say something along the lines of "You're permitted to share this with tax authorities as required by law." Well, as we've just discussed, this is an informal process. So it's not technically meeting that standard to voluntarily disclose it to HMRC at this stage.

And so sometimes writing to HMRC and saying, "We don't have the ability to provide this to you without breaching confidentiality obligations we have. But to the extent that you really need this document, we could provide it if you issued us a Schedule 36 notice," is quite a good way of showing the willingness to be compliant and cooperative with HMRC, but making sure that you're not inadvertently tripping up over any confidentiality provisions and getting into hot water there.

Neil Donovan:

Yeah, I mean, it's a good point that there's a balance, isn't there, between trying to voluntarily cooperate and come across as a cooperative party, but at the same time not exposing yourselves to potential litigation for breaches of confidentiality provisions that you may owe to third parties. And again, something that we have to grapple with with a number of the other enforcement authorities as well.

And I think the point you make around just really carefully thinking about the information that is disclosed on a voluntary basis is a really critical one. If we think about large groups—for example, corporate groups providing information—not disclosing anything that could potentially expose another member of the group that isn't subject to the notice or subject to the enquiry is the type of thing I think clients have to be careful of.

Sophie Suri:

Yes, it's a really good point, Neil, because HMRC is only technically allowed to ask for information that is necessary for them to conduct their enquiry. They're not allowed to just go on a fishing expedition. And you're quite right, it would be easy to send them reams of information that then inadvertently opens the group up to further questions or unwelcome further lines of enquiry. So definitely something to be careful of.

And one of the other points that sometimes gets missed—I've seen examples of in the past—is taxpayers providing lots of information that contains sensitive personal data and potentially breaching their GDPR obligations. So again, another reason why it can be very helpful to get lawyers involved early on in the process to make sure that whatever's being disclosed on a voluntary basis is protecting the taxpayer's position on a broader basis, as well as making sure, as you say, that that balance is there of maintaining the right level of cooperation with HMRC and being shown to be a good taxpayer that's going to cooperate with HMRC throughout the course of the enquiry.

Neil Donovan:

Okay. So we've received the initial notice, responded to that and taken the steps that you've outlined in terms of working with advisers and just stepping through those checks and balances really to make sure what's being provided is within the scope of the notice. And how can the enquiry then progress? What would happen next?

Sophie Suri:

So I touched on this briefly earlier, but just to recap: the enquiry might progress to HMRC concluding that no further tax is owed. And that is obviously the best outcome and that could be achieved. And that's what we work hard to do in the tax team at Ashurst—that's what we're looking for. We're looking to show HMRC that the tax collected in that period was sufficient and that there's been good cooperation throughout and we can close off the enquiry. End of story.

But of course it doesn't always end there. And that's inevitable. It may be that HMRC then considers that there's further tax to pay and they will then issue what's called a "discovery assessment" during the course of the enquiry. And that means that they've discovered an insufficiency of tax in that period. And it may be then that HMRC goes back for further years to collect that tax.

And how far they can go back depends on the taxpayer's behaviour. And again, that's a really important area to get advice on—as to whether the behaviour could arguably be deliberate, which is the worst case scenario, or careless. And each of those standards might increase the amount of time that HMRC could reopen previous tax returns and collect additional tax in respect of the same matter.
If the taxpayer doesn't agree with HMRC's assessment, then it may appeal that. It would have to do so within thirty days and set out all of its grounds for appeal. It's important to make sure that those grounds are set out—sort of adopt a kind of "kitchen sink" approach so that you're not ruling out any arguments that you might want to make later in the process.

And that's, as I mentioned before, where a tax dispute is considered to really begin in earnest and may then eventually progress to the Tax Tribunal. So you can see there that the enquiry really is potentially the start of a much larger scale investigation from HMRC. And it can take many years to resolve in some instances and a lot of resource from taxpayers. So getting off on the right foot at the very start of the enquiry can be really, really helpful in ensuring that these quite difficult processes are managed as smoothly as possible.

Neil Donovan:

Thanks, Sophie. So of course, one of the risks from a wider investigation is that it could lead to potential criminal enquiries as well. Do you want to just touch briefly on how the enquiry process could evolve into a full tax evasion criminal investigation?

Sophie Suri:

Yes. So the tax enquiry process is a civil process. But if, in the course of gathering information, HMRC consider that tax evasion—sometimes referred to as tax fraud—may have taken place, then they may begin a criminal investigation.

And unlike tax avoidance, which might be what HMRC initially started opening the enquiry about, tax evasion is a criminal offence under UK law. And it's the HMRC Fraud Investigation Service, or FIS, that is responsible for all of HMRC's criminal investigations.

And if, in the course of a civil enquiry, HMRC start to consider that, they will liaise with that team. And the FIS team may then undertake a review and evaluation of all the documents that have already been acquired by HMRC in the course of the enquiry, and then they'll consider whether any further information is required for the purposes of the criminal investigation and how to obtain that. So that might be by searching premises or interviewing any suspect under caution. But we're then into a very different realm and a different team at HMRC.

Neil Donovan:

Yes. And of course, tax evasion is predicate conduct for other criminal offences as well. So money laundering could—you could be facing a money laundering investigation. And cheating the public revenue is a base fraud offence for the purposes of the new failure to prevent fraud offence, which is a corporate criminal offence introduced in September this year. So there's a risk this could very quickly—where there is that suspicion—this could spiral into a multi-agency investigation where you're fighting on various fronts and facing a whole spectrum really in terms of liability risk.

Sophie Suri:

Yes, that's exactly right. This could potentially be the first step in a much larger and very complex investigation.

Neil Donovan:

So just to wrap up then, Sophie, your top tips, advice for how a taxpayer should engage with HMRC if they receive a request during this enquiry season?

Sophie Suri:

Yes. So unsurprisingly, taking advice early on in the process, as I've mentioned, is really key. It can be very daunting to receive an enquiry notice. But with the right advice, and depending on the matter, this can be quite efficiently and swiftly resolved in the majority of cases and mitigate the risk of further action.

Again, don't over-disclose early on in the process. Consider your rights as the taxpayer and the limitations on HMRC's powers. There are often procedural mistakes made by tax authorities. And those limitations on their powers and the procedures that they have to follow—it's not a trick or way of getting out of responding to an enquiry. Those are important checks and balances on the tax authorities' powers. And it's right that a taxpayer test them and make sure that the tax authority isn't operating outside of the bounds of those statutory limitations.

And then generally ensure that there's good record-keeping practices on an ongoing basis, so that if there are any requests for information from HMRC or an enquiry is raised, or you might get a general question from the tax authority outside their statutory powers, it's easier to deal with those requests when you've got a clear data set and you know where your documents are.

And so a top tip really is to keep your governance and document record-keeping systems up to date so that you're as best prepared as possible.

Neil Donovan:

Brilliant. Super helpful tips. Thanks very much, Sophie. And it's been really interesting learning a bit more about the HMRC enquiry process. So thanks very much for joining me today.

Sophie Suri:

Thank you, Neil. And thank you everyone for watching or listening to this episode of the Corporate Crime and Investigations podcast. And we look forward to seeing you next time.

Neil Donovan:

Thank you.