HMRC investigations in divorce

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 [2008] (EWCA Civ 1458, [2009] 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.

Step 1

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.

Step 2

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.

Step 3

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.

Step 4

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.