HMRC are currently sending out batches of Tax Return Enquiry Notices relating to tax years 2014/2015 and 2015/2016.
This FAQ is in case you have received such correspondence and are unsure why or what to do next. This article is for information only and is not a substitute for seeking independent tax advice.
Q: What is a Tax Return Enquiry?
A: An Enquiry is where HMRC check in more detail the information on a tax return is correct and complete. There should be an accompanying leaflet (“compliance check”) that provides more background as to what you can expect.
HMRC has access to a wide range of electronic data sources which are fed into a profile matching system, with any discrepancies (regardless of immateriality) resulting in an enquiry being opened.
Q: Why have they selected me?
A: If your letter references use of a contractor loan arrangement/scheme then that will be the trigger. HMRC do not like any form of loan based contractor scheme for obvious reasons. If there is no reference to a loan scheme, it is possible you might have been selected at random, or it is the result of HMRC believing there to be an inaccuracy or omission on the return.
Q: Why are HMRC sending it now?
A: Generally speaking, HMRC has 12 months from the date you submitted your return (provided it was not received late) to open an enquiry. They can go outside of that period if they believe the tax return to be an “incomplete disclosure.”
Q: I did use a scheme – how does HMRC know about this?
A: There are several possible explanations including;
- If you referenced on the return(s) about receiving contractor loans that will act as a “red flag”.
- If yours was a DOTAS scheme and you included the SRN on your return (as the law requires you to do);
- If the promoter employed you (i.e. they operated PAYE on your pay) and HMRC associates that employer with facilitating tax avoidance, then through RTI/P11D submissions HMRC can see your payment footprint.
- If you used schemes previously, HMRC might have a hunch (rightly or wrongly) you are a creature of habit who continued to receive contractor loans in subsequent years.
NB: The above list is not intended to be exhaustive.
Q: HMRC are asking for my outstanding loan balance – should I provide this?
A: That is up to you and will depend on how you want the matter to play out in future. Some will provide, others will not. The request for loan information at this time is voluntarily, even if it might not read as such. As a general rule, you should not provide any kind of response back to HMRC until you have understood the pros and cons of doing so.
Q: I’m really worried by this letter – what should I do?
A: It is expected you will feel that way because behavioural psychologists have input into the choice of words to maximise the emotional response. If you used a scheme in those year(s), consider contacting the promoter to see what support may be available. If they are no longer around or there is no support, consider speaking with a tax advisor or accountant who you trust to act in your best interests. One thing is clear-however – enquiries do not go away by ignoring the letter (however tempting that might seem!) so put yourself on the front foot now to seek to secure the best outcome under the circumstances.