HMRC compliance activity in light of the impact on resources from Covid-19

HMRC has the responsibility of ensuring that businesses, contractors and individuals are paying the correct amount of tax, CIS and national insurance contributions (NIC) and are required to check that tax payers are meeting those responsibilities.

Historically HMRC has opened compliance enquiries to check that businesses, contractors and individuals are complying with their relevant tax, CIS and NIC duties. However, the method by which these enquiries are currently 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 likely that the majority of more recent enquiries will have been conducted via correspondence, known within HMRC as a “desk intervention”. The Guild has supported and assisted clients through a number of such enquiries.

This shift in compliance activity comes following periods of internal restructuring within HMRC, resulting in a reduction in the number of both offices and staff. With fewer local offices and staff throughout the country, more emphasis has been placed on undertaking compliance enquiries via these desk-based interventions.

HMRC’s process for selecting compliance enquiry cases is based on risk-assessment and also risk-profiling, using a range of information extracted from the various tax returns and records submitted to HMRC. This process is a means to 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 a risk has been identified that requires further investigation.

Currently, due to 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 sought 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 April 2021, 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, in fact, 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 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, so, in the short-term, compliance activity is likely to be concentrated in this area. However, 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, taking into consideration their office closures programme, coupled with the current new ways of working, it may be expected that their staff will 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, when compliance activity is back up and running, will HMRC adopt their normal risk-profiling strategy or will they turn their attention away from industries adversely affected by COVID-19 such as leisure and hospitality and focus on perceived financially stronger areas. HMRC are, nevertheless, tasked with ensuring that the appropriate amount of tax, CIS and NIC are being paid, so the question remains whether HMRC will maintain their approach to compliance generally or decide to adopt a less heavy-handed approach 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 is anticipated that their compliance activity will recommence once the impact of COVID-19 on HMRC resources has lessened.

If you are a business with an open enquiry or an accountant with clients who have open enquiries, then you may wish to talk to one of our in-house experts about the potential to review the state of the enquiry and possibly mitigate any open points with a view to bringing it to closure.