In June this year, my fellow JPA International colleague from Ulysse BDA in Bordeaux, Alexis Degagny, made a presentation on the French tax investigation process at the Tax Club conference in Dubrovnik.  Following this, we thought it would be interesting to make a comparative study of JPA International member firms understand the tax investigations process in their own countries.  Alexis and I hope to start the survey in the Spring of 2025 in preparation for a presentation at the JPA International conference in Bonn, Germany, in May 2025.

As part of our preparation, a presentation was made in the Barcelona Tax Club meeting on the tax investigation process in the United Kingdom (UK), focusing on transfer pricing.

Introduction

HM Revenue and Customs (HMRC) approach investigations on the basis of processing the tax return first and checking it later, within statutory time limits.  They also have a vast database to build the profile of a business or individual and if there are inconsistencies or anomalies in the information they have, they could directly raise an investigation. They can also randomly check the information a business or individual has provided to validate its accuracy.

With this in mind, typical types of tax investigations are:

• Aspect enquiry:  where there is an obvious error or omission, or HMRC think a correction is required based on the information they hold.
• Full enquiry: which can be a full in-depth or specific investigation due to the significant risk of error in a tax return.
• Discovery assessments: which arise because of suspected under declaration of tax.

Governments are seeking to protect their tax base for various reasons, especially due to spending pressures. The UK Government is not immune to such pressures. In the UK Finance Minister’s Autumn Budget in October 2024, she announced that the ‘tax gap’ was hoped to be narrowed through measures to collect additional tax revenue of £6.5 billion a year by 2029/2030. This is to be achieved in part by recruiting an additional 5,000 compliance staff and to provide additional funding for 1,800 tax collection staff in HMRC.

The normal tax investigation process

HMRC would open a tax investigation by issuing an opening enquiry letter. This explains why they are starting an investigation and detailing the information they will require from the taxpayer.   They would expect the taxpayer to provide this information within 30 days of the date of the letter and will allow extensions. Correspondence with HMRC can take up to 30 days to answer and should HMRC be satisfied with their investigations, they will either issue a closing enquiry letter or enter into a settlement agreement with the taxpayer detailing the tax they compute is owed, with interest and penalties.  The average time to close an enquiry could be between 3 to 15 months, spending on the complexity.

HMRC have a code of conduct to follow and act in accordance with Human Rights legislation and data protection laws.  The administration process and the powers of HMRC to obtain information is established in tax law.

HMRC internal manual notes that an officer should not make ‘protective investigations’ merely to extend time limits to investigate a taxpayer’s position of in case the tax officer later discovers a loss of tax.  A revenue officer should not make an assessment if they merely suspect there may be a loss of tax or to keep a tax year open to allow them to make further enquiries into a risk.

If taxpayers are in dispute with HMRC’s approach, there is a complaint handling procedure on the conduct or actions of an HMRC officer.  If HMRC and the taxpayer are in dispute over findings, they can go through a mediation route called the Alternative Dispute Resolution or move to the litigation stage by going to Tax Tribunal and then the Courts. 

The investigation process for transfer pricing

HMRC’s internal manuals refer to a number of stages:

Stage 1: risk assessment

HMRC should conduct a full risk assessment to ensure that enquiries are only opened in appropriate cases, looking at elements such as: the value of tax at risk; the behaviour of the taxpayer; and the complexity of the transaction and whether it involves a point of principle.

Stage 2: opening an enquiry

An enquiry should be opened if a business case is demonstrated. The officer should work with the taxpayer to develop and agree a timetable and action plan, informing them of which transactions are to be looked at and to ascertain required information. Taxpayers have 30 days to submit their transfer pricing policy upon receiving the opening enquiry letter.  

HMRC have committed to settling most cases within 18 months, with more complex cases expected to take up to 36 months.  The enquiry will be treated as completed when adjustments are either agreed or found to be unnecessary, or when formal proceedings are required in the form of litigation. 

Stage 3: the conduct of the enquiry

When formulating the timetable and action plan, officers and the taxpayer should ensure that they are acceptable so that the enquiry cam be conducted accordingly.  The timetable may be extended beyond 18 months if the enquiry is complex and high risk.  High risk indicators include: the behaviour of the taxpayer and consideration of culpability; cases involving transactions with low tax jurisdictions; and cases with a precedent value.

Stage 4: management of the enquiry

A series of review points, typically occurring every 6 months, should be built into the timetable, with a decision at each review of how the enquiry should proceed.

Stage 5: closing the enquiry

 When all information has been collated and analysed, HMRC are required to come to a decision as to whether to close the enquiry without an adjustment, or to reach a settlement or to proceed to litigation. In the case of a negotiated settlement, they should ‘always be informed and the outcome defensible’.