HMRC like to fish, even when there is no known case to be made, but this is wrong: HMRC’s Compliance Handbook at CH23560 also recognises that: “Reason to suspect does not allow you to make speculative enquiries, seeking information merely in the hope that something relevant will crop up. You must be able to identify specific risks.”
Informal discussions can be helpful to identify simple mistakes but if an inspector has more investigative questions to ask he must open a formal enquiry.
Why this is important
Firstly, if HMRC is enquiring into your tax affairs you want to know why that is, if they are doing a bit of speculative fishing they won’t tell you.
Secondly, HMRC has strict rules about when they can open an enquiry, they can only ask questions within a limited time frame; but if no investigation has been opened and they are just fishing they might ask you anything from any time.
Thirdly, there is the risk that you will have to deal with HMRC once informally and then again officially. John Cassidy says, “HMRC can formally enquire once only. Not recognising the informal approach as an enquiry leaves the door open for the same or another inspector to open one later.”
Fourthly, you have no rights; an in investigation has a beginning and an end, HMRC can ask speculative questions any time they want, also you can’t use the Tribunals, use the Alternative Dispute Resolution or complain in any way – all these avenues are only open to people who are being investigated.
HMRC may well say; if you don’t answer our questions we will open an investigation, but if you’ve got to that point HMRC are very likely to open an investigation anyway, it may well be better for you to know what you are dealing with.