HMRC can make requests for information/documentation either informally or formally (see information requests) and HMRC can levy penalties for failure to respond within their timescale.
What sort of documents can be requested?
Bank and building society statements are amongst the most frequently requested documents by HMRC along with purchase invoices. These can be held either in paper or digital format.
What sort of timescale can be imposed?
Schedule 36 FA 2008 gives the recipient a minimum of 30 calendar days in which to respond in full.
So how should such a request be handled?
With careful and full consideration of the potential consequences.
Whilst a degree of urgency may result in a desire to provide a quick response, taxpayers are urged to take their time and ensure the basics are answered such as is the request valid and is the information “reasonably required”?
Beware of gobbledygook
They do say that we should act with more speed and less haste. Otherwise, we can cause even more confusion and problems for ourselves.
It is important that we understand why HMRC is making the request. Otherwise, it may simply be a fishing exercise on the part of HMRC. Where HMRC’s activity is considered to be straightforward, the request for information may come from one person within HMRC. In more complicated cases, HMRC can involve a number of HMRC staff, each with with their own speciality and input.
Where the request can be as a result of input from more than one person within HMRC, each can act independently of each other. The result can be that each part may then contradict with each other when included in the one request. Result: gobbledygook.
Even where the request has passed all of these tests, consideration should also be given to providing a detailed narrative to be submitted alongside the documentation itself. This may dissuade HMRC from making their own assumptions. The narrative may seek to explain any missing data, the reason for such a transaction taking place, why a particular is or is not taxable.
HMRC will not just “put the response on file”. They will work on its content. HMRC will look at the date, the address and the narrative in line with the thrust of their previous enquiries. Each line and every entry will be scrutinised in depth.
Is all the information being requested available?
The worry can start where there are any gaps. Any gaps in the information will need to be filled otherwise HMRC may start to make their own assumptions.
Some of the information or documentation may no longer be available. HMRC may still ask the taxpayer to request that information or documentation again from a third party. Be aware that HMRC themselves can go directly to a third party without notifying the taxpayer.
With information and documentation in front of them, HMRC will ask the simple question of themselves “Does the information now before them support or contradict any verbal explanation of a transaction that may have been provided. Specifically, does the information support the treatment for (UK) tax purposes.
Can a taxpayer refuse to comply?
Yes. But penalties may result. Both an initial penalty and daily penalties until the taxpayer does comply.
Moreover, HMRC will not just walk away. HMRC may consider such a stance as being bad behaviour by the taxpayer so far as any other penalties may be concerned.
But what if the taxpayer wants to comply – are there any hidden dangers in simply handing over what is being requested?
Yes. Many. Just put yourself in the position of HMRC for a moment and imagine a request for a taxpayer’s bank statements has been made. There is a lot of new information to be absorbed by HMRC.
What are the specific risks of providing bank statements?
Looking at any information starkly can result in things being taken out of context.
For example, any unexplained bank activity can lead to:
- Any one-off deposits for the period being treated as regular undeclared taxable income in previous periods
- Movements between accounts being double counted
- Loans and capital introduced being treated as taxable income
The bank statements themselves are evidence; they are not explanations. Without context, any information/documentation provided without such explanations invite assumptions to be made by HMRC. Those assumptions can significantly overstate any tax exposure.
Once provided to HMRC, it is difficult for that information or documentation to be withdrawn. But why would you want to withdraw them?
Because any unexplained entry can trigger another question from HMRC.
That was not the intention.
In summary
Providing HMRC with information and/or documentation is a regular occurrence.
Doing so correctly can reduce the overall time it can take to resolve the situation with HMRC (and stress levels).
But there are dangers.
Seek specialist advice from somebody experienced in dealing with HMRC on tax investigations and disputes in advance. Don’t be caught out.
Anyone seeking help can call me on 07979 313 010 or email me at paul@pmc.tax.