Formerly, HMRC enquiries used to be conducted by the organisation, which would arrange a date and time to visit a business, arriving on the day with a blank questionnaire. The investigators would review the company’s books, looking for any errors, and would interview the main shareholders and directors.
An enquiry would usually be triggered by a sudden rise in expenses or a sudden reduction in turnover or sales. When Self-Assessment arrived in the 1990s, HMRC generally used full enquiries rather than smaller aspect enquiries.
In recent years, HMRC has been changing its approach. In 2009, the organisation introduced Connect. This analytical software is used by HMRC to decide who should be investigated. The Connect software allows HMRC to compare information declared on tax returns to the data held in a massive data warehouse. HMRC will be using this software to review the details of companies and individuals to check that the correct amount of tax and national insurance is being declared and paid.
The Connect software has definitely had an impact, with VAT visits and repayment checks increasing by 25 per cent. For accountancy firms, this has been good news. Accountancy fees have risen and there has been a decline in self-assessment.
Scheme reviews in the PAYE and construction industries have almost doubled. The fees for these have dropped by almost 50 per cent. However, this is one area that HMRC likes to concentrate on, and employers or contractors in this industry sector can expect to receive a visit every five to six years.