HMRC’s enquiry and correction powers

Reforms aimed at improving efficiency

A key consultation on proposed reforms to HMRC’s enquiry and correction powers closed yesterday. Dubbed the "Tax Administration Framework Review – New Ways to Tackle Compliance", this consultation is the latest in a series aimed at streamlining the UK’s tax system. The goal? To make it easier for taxpayers while enabling HMRC to allocate resources more effectively.

Why reform?

The Government's main priority remains closing the “tax gap” – the difference between  taxes owed and taxes collected. Perhaps surprisingly, most of this gap comes not from deliberate tax evasion, but from small, unintentional mistakes by individuals and small businesses. These errors, while often minor in themselves, add up to significant sums, prompting the need for reform.

The growing challenge

The number of taxpayers is rising, as is the complexity of the tax code. The self- assessment population has grown over the last 10 years by 25%, from 9.2m to 11.5m. This, coupled with the ease and speed of making repayment claims, has led to an increase in claims, many of which contain small inaccuracies. The current system of tackling these errors is slow and resource-intensive, requiring detailed engagement with HMRC, which may not be proportionate given the small amounts involved. HMRC hopes to remedy this by simplifying the process for correcting such minor errors.

HMRC's existing powers

HMRC uses various powers and processes to promote compliance and address non-compliance based on risk. These include:

• HMRC prompts: Communications and education to guide taxpayers before self-assessment returns are submitted.
• customer amendments: Taxpayers can correct errors within a set time.
• HMRC "Nudge letters" and/or "One to Many" campaigns: Targeted letters sent to individual taxpayers and/or groups of taxpayers with the intention of encouraging compliance or the correction of an identified mistake.
• revenue correction powers: HMRC can correct returns without an enquiry if errors are discovered.
• enquiry powers: HMRC can open enquiries into returns or claims
• assessment powers: "Discovery" assessments can be raised if the enquiry window has closed.
• information and inspection powers: HMRC can request information from taxpayers or third parties to verify tax positions.

In recent years, HMRC has introduced a broad range of processes to prevent inaccurate claims for tax relief and promote better compliance, including:

• changes to policies and processes, for example, a new evidence requirement for Payment Protection Insurance (PPI) tax relief claims introduced in December 2023.
• applying automated and manual credibility checks to claims submitted pre-payment increases in agent control processes.
• helping to prevent taxpayers being misled by inaccurate advertisements by working in partnership with the Advertising Standards Authority.

The proposed reforms

Notwithstanding the above, there remains room for improvement. Several key changes have been suggested in the consultation to modernise HMRC’s approach in this area:

• increased information requirements for claims: Currently, many claims can be made  within a tax return with minimal supporting details. The proposal is to require more information upfront, especially for areas prone to errors (such as R&D relief). This would allow HMRC to quickly identify issues and process legitimate claims faster.
• aligning revenue correction notices across tax regimes: At present, the conditions for issuing a Revenue Correction Notice vary across different tax types. Standardising the process would make it clearer for both taxpayers and HMRC. This alignment would mean that both parties must provide reasons when a correction notice is issued or rejected.
• introduction of a partial enquiry: A partial enquiry would allow HMRC to investigate a specific issue or section of a tax return, rather than reviewing the entire return. This targeted approach would help resolve issues more quickly while still leaving room for full enquiries to be opened, if necessary.
• the self-correction power: A new proposal suggests that HMRC could require taxpayers to self-correct their tax returns if a widespread error is identified. HMRC would issue a notice to taxpayers, giving them a chance to amend their return or explain why their return is correct. Failure to comply would result in penalties being imposed, although taxpayers would have the option to dispute such a notice.

What this means for taxpayers

Currently, when HMRC opens an enquiry, virtually any aspect of the return can be questioned, with no set time limit to conclude the enquiry. If implemented properly, partial enquiries and self-correction notices could speed up the process and reduce the burden on taxpayers, particularly for those cases involving minor errors. The requirement to provide more detailed claims upfront also seems reasonable, as it could lead to faster  resolutions.

However, there is a risk. If these new powers are applied broadly or without precision, taxpayers could be required to navigate additional bureaucracy and face prolonged investigations. This would undermine the stated aim of simplifying the system and could make the process more cumbersome and time consuming.

What this means for advisers

The proposed changes considered under the consultation will be of great importance to advisers and their clients alike. Advisers will need to keep up to date as to the reforms and their implementation, to provide appropriate advice and ensure their clients are aware of new requirements. The requirements as to self-correction and partial enquiries are likely to be key factors for consideration, which in turn may also increase the pressure on adviser turnaround times. Further, advisers should be alive to the fact that whilst a partial enquiry is intended to consider a specific point, this would not prevent future partial enquiries being made, or HMRC subsequently opening a full enquiry into a return extending the process.

R&D claims are likely to remain a "hot topic", especially given the proposed requirement for full information to be provided when submitting claims in this somewhat challenging area.

Top Tips for taxpayers and their advisers

• Be thorough: Always ensure claims are as detailed and accurate as possible to avoid delays or the need for corrections at a later date. Extra information upfront may save time in the long run.
• Stay informed on changes: Keep an eye on any updates from HMRC regarding these reforms. Understanding the new requirements, especially around self-correction and partial enquiries, will help you/your client stay ahead.
• Document everything: When making claims or submitting returns to HMRC, maintain clear records and supporting documentary evidence. This will help in the event additional information is required or an enquiry is opened.
• Monitor the tax position: Regularly check your tax returns for any potential errors or areas that could trigger scrutiny. The sooner mistakes are identified, the easier it will be to take corrective action. Advisers be ware – this applies to you as well!
• Know your rights: Understand the appeals process should you disagree with a correction notice. HMRC’s view can be challenged, and being proactive in addressing discrepancies can help avoid penalties being issued. This is equally relevant to both individuals and advisers.

In short, while these reforms aim to streamline the tax process, staying informed and prepared will be key to navigating the new system successfully.

Please contact Alexis Armitage or Sarah Dowding if you have any queries or wish to discuss anything further.