HMRC has the responsibility of ensuring that businesses and individuals are paying the correct amount of tax and national insurance contributions (NIC) and are required to check that taxpayers are meeting those responsibilities.
Historically HMRC has opened compliance enquiries to check that businesses and individuals are complying with their relevant tax and NIC duties. However, the method by which these enquiries are undertaken has changed significantly over recent years.
Whilst there will have been occasions where HMRC officers have continued to undertake an enquiry in person, it is more likely that the majority of enquiries will have been conducted via correspondence, as this has been the preferred approach for a number of years.
This shift in compliance activity comes following periods of internal restructuring within HMRC, resulting in both a reduction in the number of offices and staff. As there are fewer local offices and staff throughout the country, more emphasis has been placed on undertaking compliance enquiries via desk-based interventions.
HMRC’s process for selecting compliance enquiry cases is risk-based and relies on profiling, using a variety of information held which is extracted from the various tax returns and records submitted to HMRC. This process is a means of identifying potential areas where there may be tax liabilities to address and the initial selection is extracted using specially-designed computer programmes.
Whilst an area may be highlighted as a risk, this does not necessarily mean for the taxpayer that their returns submitted are incorrect or that a tax liability does arise, but from HMRC’s perspective they consider that a risk has been identified which requires further investigation.
Currently due to the impact of Covid-19 and the implementation of several support schemes to help businesses and individuals, HMRC has had to redeploy a significant number of staff from their normal business streams to assist with the processing of both the Coronavirus Job Retention Scheme (CJRS) and the Self-Employment Income Support Scheme (SEISS).
As a result of this, HMRC has looked to put on hold the majority of current open compliance enquiries unless the taxpayer has specifically advised that they wish for the enquiry to be continued. With the extension to the CJRS scheme until the end of October 2020, it is to be expected that HMRC’s focus will remain on ensuring that the scheme and payments are processed rather than continuing to work current compliance investigations or, indeed, open new ones.
In these uncertain times, it is not clear for how long action on these open enquiries will be suspended or when HMRC will look to resume its normal compliance activity. It is highly unlikely that open enquiries will remain on hold indefinitely, particularly as there will be time limits for raising assessments where it is established that a liability does exist and these will need to be adhered to.
HMRC has made it clear that they will be auditing CJRS and SEISS claims to ensure that businesses and individuals are entitled to the amounts claimed, and so, in the short-term, compliance activity is likely to be concentrated in this area. But given the sums spent on the Covid-19 business support schemes, it would be expected that normal compliance activity will need to recommence, and even increase, to replenish the funds available to the government.
As with other employers, HMRC currently have staff working from home and, with their office closures programme and new ways of working, it would be expected that their staff may well continue to be given the opportunity to work from home. This will undoubtably mean that compliance work, once it recommences, can continue to be carried out remotely without the need to visit in each instance.
The question is, once compliance activity is back up and running, will HMRC adopt their normal risk profiling strategy or will they look to steer away from industries adversely affected by Covid-19, such as leisure and hospitality, and focus their attention on perceived financially stronger areas. HMRC are nevertheless tasked with ensuring that the appropriate amount of tax and NIC are being paid, so the question remains whether HMRC will maintain their approach to compliance generally or, decide not to be too heavy-handed in the current fragile economy.
With the government initiative to build, build, build, the construction industry could potentially see an increase in compliance activity once HMRC recommences its enquiries process. The reasons being that increases in construction projects could highlight perceived risk areas within this sector, such as employment status, incorrect CIS deductions and material costs. This information will be readily available to HMRC via the monthly CIS submissions made by contractors and therefore easy to risk profile.
HMRC will undoubtably remain committed to ensuring that businesses and individuals are meeting their appropriate tax responsibilities and it would be expected that their compliance activity will recommence once the impact of Covid-19 on HMRC resources has lessened.