HMRC investigations in divorce
HMRC » May 20, 2021
HMRC enquiries are often long running and some individuals are unlucky enough to have an enquiry coincide or overlap with a divorce. In this article we look at:-
- What questions to ask the other party if they are under investigation;
- How to create a plan if your client is under investigation;
- How an enquiry ends.
In the Budget it was announced that the government are investing £100 million into a Tax Protection Taskforce to tackle fraud across all Covid-19 support packages and recruiting fraud investigators. So it’s likely that we will see more investigations particularly into self-employed individuals and family companies.
What is an HMRC investigation?
Being under an HMRC investigation can be described as anything from a letter from HMRC to a formal Schedule 36 enquiry. It’s important to establish at which stage (and under which power) HMRC are communicating with your client with.
What’s at stake?
The most serious outcome for tax evasion is prison. Then there are tax bills, penalties of up to 200% of the tax due, and being publicly named and shamed.
Two of the main issues that I think about when having an uncertain amount of tax due are (1) there can be a tendency to want to drag out the investigation. This past 12 months we have worked with individuals who have been involved with an HMRC enquiry for over 11 years, and (2) I suspect it is harder to reach a financial settlement without knowing how much net cash is actually available.
Questions to ask the other party
If the other party is under investigation with HMRC, it could cause delays in moving forward and cause confusion over the actual value of the parties’ assets. As always, open communication is going to be critical and some key questions to ask might be:-
Question: Who is within the scope of the enquiry?
If your client was a Director of the company or Partner in the Partnership, there is a strong chance they are also under investigation as well.
If your client has recently moved, HMRC may not have their most up to date address. They can call HMRC to update their address and request copies of recent correspondence.
Note: If an enquiry is opened into a Partnership, all Partners are automatically under enquiry.
Question: What was the date of the first letter from HMRC?
Establishing how long the enquiry has been ongoing should help in giving an overall picture of the situation and how willing the other party is to resolve matters.
HMRC have been criticised for the length of their enquiries and the impact that this has on businesses and people’s lives. If the enquiry has been drawn out due to HMRC delays, this can be used as leverage to reach a quicker resolution.
There are several routes available to individuals who wish to work towards a quick resolution including alternative dispute resolution or requesting an internal HMRC case officer review the file.
Question: What is the minimum and maximum amount of the tax and penalties at stake?
Knowing the maximum tax and penalties at stake will help in understanding the potential impact of the investigation on proceedings.
We have been successful in working with HMRC to produce spreadsheets (agreed by them) of the scope of the liabilities. This can be a useful starting point. However, be wary of estimating the liabilities.
In Judge v Judge  (EWCA Civ 1458,  1 FLR 1287) W accepted H could have a tax liability anywhere from £0 to £14m. She received £6.25m on a clean break basis, worked on the fact that H had a £14m liability. H was able to negotiate his liability down to circa £600k.
Question: What are the grounds of the other party’s disagreement with HMRC?
If their argument is a ground breaking legal argument then it is likely the case will go to Tribunal or at least take a long time to resolve.
If their argument is that they spend 60 days in the UK and HMRC are saying they spent 90 days in the UK, this would (hopefully!) be more straight-forward to respond to and to provide evidence of.
Knowing the issues and arguments can also help to guide the case to a conclusion.
In one case we worked on, the enquiry had been ongoing for 11 years. Once we entered dialogue with H and his advisers, we understood that they agreed the tax was due but were appealing the penalties. In this case we facilitated accelerating the tax payment and reduced the unknowns to only the penalties.
Question: What are the potential penalties?
Penalties range from 0% to 200% of the tax due. This can be harder to estimate because usually penalties are linked to the unpaid tax. If the unpaid tax is in dispute, it Is harder to apply the relevant penalty.
Usually HMRC establish the amount of tax owed before applying penalties. The penalty is then based on the behaviour of the taxpayer (eg careless, deliberate or deliberate and concealed). It is also possible to mitigate the penalties.
Question: If the enquiry is unsuccessful what are your proposed next steps?
Knowing what the other party are hoping to achieve will be useful for next steps. There are several escalation routes with the final one being taking the case to Tribunal.
There are three different ways a case might be heard at Tribunal. The most straightforward involves a paper submission only. However, even this route can take many months for the case to be heard.
Question: What are the parameters of the enquiry?
Due to the nature of HMRC enquiries, they can span several elements. It is possible to request part closure notices which will close down some parts of the enquiries.
It might be that part of the enquiry can be agreed and a partial closure notice issued. A partial closure notice shuts down one or more parts of the enquiry.
Question: Is there potential for it to be backdated?
The answer to this is normally always yes. The standard timeframes are as follows:-
HMRC can look back at the prior four years for any reason, six years for a careless error, and 20 years for a deliberate error.
It is important to note that HMRC can only continue to look back if the error existed. They should not use these powers to open up new areas of enquiry.
For example, Jack moved out of his home in 2018 and rented it out. If an enquiry was opened into this, the earliest years HMRC could look into would be 2018.
Creating a roadmap
If your client is the one under investigation from HMRC, I would suggest the most useful way to move forward would be to create a roadmap of how to proceed. If your client is already working with a tax adviser engaging them in the conversation is likely to be extremely helpful. If they are not working with an adviser, it might be an idea to suggest this to them. A roadmap might look something like this:-
Advising HMRC of the divorce and requesting an extension to respond.
If the enquiry is not being actively managed, it may be that your client has fallen behind with responding to HMRC. Requesting an extension can provide breathing space whilst a plan is put in place.
Quantifying the maximum liability and penalties and undertaking a cost analysis.
Due to the length of time HMRC enquiries can take, it is important to consider the enquiry in the context of the divorce and also in the context of fees.
If the maximum penalties and liabilities will be greater than the additional fees to engage an adviser and dispute the issues than it may make the most sense to settle the liability. However, even clients settling should take care. HMRC have the ability to widen the scope by opening enquiries into prior years and levy penalties based on behaviour. Therefore, if the plan is to pay the tax and admit fault it can still be useful to have a tax adviser manage the process and bring it to a quick close.
Seeking a second opinion on the likelihood of success of the challenge.
If your client has decided they want to move forward with the enquiry, you could consider seeking a legal opinion on their position. For example, on one case we prepared an overview of the case, the merits and drawbacks and sought QC advice on the likelihood of success at Tribunal.
Putting a timeline in place to try and manage the process.
It is almost impossible to guess the length of an HMRC enquiry. However, if the outcome is going to impact financial proceedings it will be helpful to have everyone aware of the time frame.
We were recently successful in receiving a response on a case in just a few days as we advised the officer of the date of the Final Hearing and the impact that the tax position had on the financial matters.
Importance of a closure notice
Every enquiry should end with the issuing of a closure notice by HMRC. This is a notice which confirms the tax due/paid and it prevents HMRC re-opening the enquiry. It brings the matter to a final conclusion.
Different types of HMRC correspondence
- Nudge Letter: This is not a formal enquiry – it is a process used by HMRC to prompt individuals to check their tax returns or to consider whether they should have filed a tax return. It is a standard letter generated by HMRC’s computer. The onus is on the taxpayer and their adviser to investigate the issue and take any action required. Read more about nudge letters here.
- Enquiry Notice: This is a notice from HRMC that they intend to enquire into a taxpayer’s tax return. These must be issued within 12 months of the tax return being filed. Though HMRC do have extended deadlines to issue enquiry notices where they discover that there has been a deliberate error.
- Formal Enquiry Notice: This is a notice issued to the individual requesting information that the HMRC Officer believes ‘is reasonably required for the purposes of checking the taxpayer’s position’.
- Formal Information Notice: This is a formal request for information. The individual must provide this information unless they are able to legitimately challenge it.
On a similar note we recently prepared a document highlighting crime indicators in family businesses.