Inland Revenue Inquiries

These are intended to weed out taxpayers who pay less than they should, be it intentionally or through negligence or confusion. Inquiries usually take place when a small detail on a tax form is incomplete or incorrect. However, the ‘victims’ of such inquiries have sometimes done nothing wrong and have simply been chosen at random.

About one in 20 Self Assessment taxpayers will face an inquiry by the Inland Revenue, which has 12 months to open an investigation from the latest filing date for your tax return. There are two kinds of inquiry, both of which will begin with a letter from the Inland Revenue to you and your accountant (if you have one). Establish at the outset whether you are the subject of an aspect inquiry or a lengthier full inquiry.

If it is the former, it could be over in weeks, or even days. An aspect inquiry deals with one or two details of your tax return and will probably require you to produce documents relating to the specific matter – for instance, your pension contributions. Full inquiries can take many months to complete and will involve the Inspector of Taxes taking a careful look through your financial records.

You are not legally obliged to provide documents that aren’t strictly relevant, but you may be fined £60 a day for withholding relevant papers, and the Special Compliance Office may invoke powers to confiscate property and data.

Nor do you have to respond to the inspector’s request for a meeting. If you choose to attend a meeting, have an idea of what it is about and take your accountant with you. Do not go alone. The inspector’s staff will be listening for careless remarks with which they can justify extending the remit and length of their investigation. Be polite and patient, but if at any time you feel that you are being treated unfairly, say so – politely and through your accountant.

Because an investigation can take so long before a settlement is made with the taxman – some cases go on for up to three years – you could end up spending thousands of pounds on your accountant’s services. It is possible to buy insurance from some brokers to cover these costs (though not the taxes you might have to pay).

If you cannot come to a settlement with the Inland Revenue, you will be asked to pay an estimated figure unless you can disprove it. For this reason and the others mentioned here, it is essential that you keep all your financial records.

By law you must keep all business records for at least 22 months after the end of the tax year - five years and ten months if you are self-employed - and you can be fined as much as £3,000 if you fail to maintain or retain adequate records to back up a tax return.