Case study: Tax dispute resolution specialists quash HMRC investigation on tax return

Our tax dispute resolution specialists were engaged to resolve an enquiry into an individual’s tax return. HMRC claimed the individual had deliberately falsified their tax return. Moore Kingston Smith (MKS) pointed out that the burden of proof was on HMRC to show that there was a loss of tax and this was deliberate. We were able to satisfy HMRC it could not prove that the mistake had been deliberate and that the liability related to the year in question.

Situation

HMRC started an investigation into Mr X’s tax affairs. It had compared the total dividends reported on his tax returns over the past ten years with the distributions made by his company and could not reconcile the figures. HMRC was unsure which tax return was incorrect and their initial attempts to identify the tax return containing the error were unsuccessful.
The HMRC investigator pursued information which related to tax years more than six years old. Mr X’s advisers pointed out that HMRC would only be able to recover the tax if the omission was deliberate, ie, that Mr X knew that the tax return was misleading or incorrect.

HMRC guessed in which tax year the income was omitted and raised a formal notice of assessment relating to a tax year that had ended more than six years ago. This was on the basis that they had discovered that the tax return was incorrect and that it was “more likely than not” that Mr X knew the return was incorrect when it was submitted.

Mr X’s advisers appealed on the grounds that i) the quantum of the discovery assessment was excessive; and ii) there was nothing to support the investigating officer’s view that Mr X knew his tax return was incorrect or misleading and had acted deliberately.
The advisers highlighted the reasons for the grounds of appeal and wrote to HMRC to support their client’s case that there was no reason to suspect that the return was deliberately misleading.

Action

We were asked to discuss the options open to Mr X. We highlighted that there are safeguards, including the option to ask for an internal review, which gives Mr X the opportunity to request an officer previously not connected with the investigation to review whether HMRC correctly applied the tax legislation when determining the tax due and that the case was suitable for the Tax Tribunal. The Review Officer can uphold the decision, adjust the tax owed or cancel it.

Alternatively, taxpayers can ask for a form of mediation, called alternative dispute resolution, to try and resolve the dispute. This is proving an increasingly popular route for both sides to resolve matters without troubling the independent tax tribunal, which is both costly and time-consuming. It was agreed the best approach was to initially ask for an HMRC review so that further representations could be made to the review officer.

Solution

We reviewed the correspondence between the advisers and HMRC. It was clear that HMRC could only recover the tax if it could assert that the tax return was deliberately incorrect. This a subjective test, so it was not sufficient to simply state that the tax return was incorrect. The burden of proof rested with HMRC to show that it was ‘more likely than not’ that Mr X had intended to mislead HMRC or knew the tax return was not correct.

We highlighted that HMRC appeared to be relying on generic and circumstantial evidence to support its case and not the subjective test relevant with deliberate behaviour. We also considered that HMRC had failed to show that on the balance of probabilities the tax liability related to the year in question and the objective test where there is an alleged failure to take reasonable care. We worked with the advisers to prepare the further representations to support our case and highlight the issues with HMRC’s decisions.

Outcome

The HMRC review officer confirmed that our representations had been successful and that the notice of assessment had been cancelled. This brought a successful conclusion to what was a distressing, disruptive and time-consuming investigation for Mr X. He was the subject of a protracted investigation into how the dividend distributions reported on his tax returns reconciled with the company’s accounts over a ten-year period.

Side note

While we recognise that HMRC has the right to recover tax, this should be within the statue of limitations. The extended time limits that apply require HMRC to show that the taxpayer was either careless or acted deliberately. Expensive but necessary specialist tax advice is needed to go to mediation (aka alternative dispute resolution) or, if this fails, to ultimately take the appeal to the tax tribunal.

HMRC reviews normally uphold the decision of the investigating officer (74% of cases have been upheld in the first six months of 2024-25) with only a small proportion resulting in the decision being overturned or varied. While most tax enquiries or investigations can be resolved without the need for specialist advice, it is important that experts are brought in at an early stage where there are contentious issues or the suggestion of deliberate behaviour on the part of the taxpayer.

It is undoubtedly more difficult to persuade HMRC to overturn a decision once made. Every opportunity should be taken to attempt to resolve the issue before HMRC issues its formal decision.

Help from the experts

If you have any questions or think you may be affected by this issue, please contact John Hood on 020 4582 1440 or email on jhood@mks.co.uk.