Jessica McLellan Tax Risk & Dispute Resolution Partner

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Jessica McLellan

Tax Risk & Dispute Resolution Partner

Jessica specialises in Tax Risk and Dispute Resolution, particularly for High Net Worth Individuals, Trusts and OMBs. Prior to joining Wilson Wright, she has worked as a Disputes Resolution specialist and within HMRC Central Policy. She is also a Chartered Accountant and qualified Centre for Effective Dispute Resolution (CEDR) mediator.

Jessica has broad experience across the tax disputes landscape, from proactive tax risk management to complex disclosures, settlement of legacy avoidance schemes and dealing with CoP9 Civil Investigation of Fraud. Her strong understanding of how HMRC works enables clients to obtain certainty and comfort in complex areas, escalation of complex disputes within HMRC and using Alternative Dispute Resolution (ADR) to resolve protracted cases.

Her approach offers an in-depth insight into how to navigate through HMRC’s decision-making process and governance to progress matters for clients. Jessica focuses on achieving clear practical solutions to tax disputes within the context of wider client family or commercial considerations.

4 Nov 2022

Currently HMRC is particularly active in the owner managed business (OMB) space. They have taken the initiative by opening a high volume of cross-tax enquiries. Multi-disciplinary teams within HMRC are considering the holistic tax risk associated with an OMB, including looking at other group companies, the personal tax filings of directors and shareholders and they can also encompass Corporation Tax, VAT, PAYE, R&D relief, benefits in kind and Directors Loan Accounts and dividends on the personal side.

Whilst initially daunting, HMRC enquiries do follow a certain pattern, and it is vital to consider at the outset how best to work with HMRC to keep periods and sampling to a reasonable level, reduce the impact on management time, and keep costs from spiralling.

Typically, HMRC will open an enquiry by formal letter to both the company and current agent. An early telephone call or meeting is a good opportunity to gain some insight into HMRC’s initial risks and the type of enquiry they intend to conduct.

It is important to be open and cooperative with HMRC, as building a good rapport with the inspector in charge of your case will stand you in better stead throughout the enquiry. 

If you are involved in a full cross-tax enquiry, the amount of time and work involved in providing HMRC with the necessary information can be extensive. Our approach is to get a better understanding of the tax risks from the outset so we can better aid HMRC to address their perceived risks and swiftly bring matters to a conclusion.

It can be advantageous to give HMRC a better understanding of how the business operates, the normal type of expenditure and how the accounting systems and processes interact. Understanding both the risks and the business, helps us to agree a structured sampling approach with them, reduce uninformed questions, or cross wires and generally speeds up the enquiry process.

Meetings are another aspect of HMRC enquiries. These can seem daunting, however they in fact are very useful for humanising the interaction and agreeing a pragmatic way forward. The opportunity to discuss matters face to face can be invaluable and reduce misunderstandings that can sometimes arise from written correspondence. However, we would always advise that you have an adviser present, to ensure that the balance between cooperation and the scope of HMRC’s powers is appropriate.

HMRC has clear internal guidelines on how to conduct an enquiry, governed by HMRC’s Litigation and Settlement Strategy. Understanding their decision-making process and how they address identified tax risks, means that often there is scope to provide them with useful information that they haven’t specifically asked for or in place of historic information they may have requested but is difficult to provide. Having insight into HMRC’s processes and procedures allows us to suggest alternative ways to address a tax risk.

HMRC Information and Assessing Powers

HMRC has various legal powers to require a company to provide certain information and documents to conduct checks. It is pointless to question whether HMRC has a right to information considered part of the statutory books of the company for periods that are open for enquiry – a Tribunal would support HMRC. Equally, the information requested should be reasonable and not onerous on the taxpayer to provide. Sometimes initial requests can run into hundreds of invoices or documents, and it is important to be able to counter this in a way that does not antagonise the HMRC case team. It is important to avoid getting into a situation where HMRC uses formal powers and issues a Schedule 36 formal notice for information to be provided. This usually has a firm deadline (often 30 days), can be difficult and costly to appeal and introduces a higher legal burden to comply with the notice.

Technical discussions as to which periods HMRC has a right to look at in detail and whether enquiries for some years have been opened correctly within the right time window can arise. These considerations fit within an overall strategic view of what HMRC is looking at, how expansive the enquiry, and whether it is using its powers appropriately in relation to the risks identified.

If HMRC discovers a systemic error or an issue that affects previous accounting periods, there are specific assessing time limits that set out when HMRC can assess tax in periods that they do not have under enquiry. These time limits are determined by the behaviour that led to the understatement of tax. In the case of an error or mistake, HMRC would be able to assess tax going back four years. This increases to six years if the additional tax is because of a failure to take reasonable care and extends to 20 years for deliberate inaccuracies. There are other nuances around offshore matters and assessing time limits, but these are the primary ones encountered for owner managed businesses in these types of enquiries.

Penalties

When HMRC uncovers an understatement of tax within such an enquiry, they will consider whether a penalty is appropriate. The level of the penalty is dictated by the behaviour that led to the error, whether HMRC uncovers the error because of what is described as a prompted or unprompted means and finally the level of cooperation provided to HMRC throughout their enquiry.

The first two aspects are dictated by events that have already occurred (i.e., why the issue occurred and that HMRC have prompted its discovery by opening an enquiry), and the final by a company’s conduct throughout the course of the enquiry. That is why we advise clients to have a civil and cooperative relationship with HMRC throughout enquiries, as this can have a significant mitigating effect on the level of any penalties. This is an important factor to bear in mind throughout correspondence and meetings with HMRC from the very start of any enquiry to mitigate penalty risk.

In summary, understanding how HMRC runs cross-tax enquiries enables you to have a tight strategy to deal with them most effectively from the start. No one wants a tax investigation, but if it does happen, by working with HMRC in a conducive, informed, and professional way, the length of the enquiry and costs could be significantly reduced.

Please talk to our specialist team who have practical and detailed knowledge of HMRC practices, if you have any concerns or would like further advice or information.