HMRC Compliance, "Payments on Account," and Dispute Resolution

For UK Self-Assessment filers, HMRC interaction is more than the annual return. Payments on account create a year-one cash flow shock of 50% above expected. Enquiries can reach back 4 years (careless), 6 years (negligent) or 20 years (deliberate). Discovery assessments allow HMRC to revisit closed years on new evidence. Time to Pay arrangements give breathing space when cash is tight. Tax investigation insurance covers the professional fees of fighting an enquiry. This is the compliance layer where the practical cost of getting it wrong sits.

Payments on account: why year one is 50% worse

Payments on account are pre-payments toward the next year's tax liability. They are required when:

1. 1Prior year Self-Assessment liability exceeded £1,000.
2. 2Less than 80% of prior year tax was deducted at source.

When required:

• First payment on account: due 31 January (alongside prior year balance).
• Second payment on account: due 31 July.
• Each is 50% of prior year tax liability.
• Balancing payment (or refund): due 31 January following the tax year end.

Reducing payments on account when profits fall

Where current year profits will be lower than prior year, payments on account can be reduced via SA303:

1. 1File SA303 online via the personal tax account.
2. 2Estimate current year tax liability.
3. 3Reduce each payment on account proportionally.
4. 4If estimate is too low and actual liability higher: HMRC charges interest on the underpayment.
5. 5Best practice: reduce conservatively, leaving a small buffer.

Surviving an HMRC tax enquiry

Self-Assessment enquiries can be opened within 12 months of the return filing date (or 12 months of the return being filed late). Mechanics:

• Opening letter from HMRC stating the enquiry.
• Initial information request, usually requiring response within 30-60 days.
• HMRC reviews, may issue further information requests.
• Conclusion: closure notice with no adjustment, or amendment to return.
• Right of appeal to First-tier Tribunal where the taxpayer disputes the closure.

Discovery assessments: how far back can HMRC go?

Discovery assessments allow HMRC to revisit closed years on new evidence:

Discovery requires HMRC to demonstrate the taxpayer could not have been expected to declare the matter at the time of the original return. This is a high bar where the return was complete and accurate at the time, but a low bar where the return was incomplete.

Time to Pay arrangements

Where the taxpayer cannot pay on time, HMRC offers Time to Pay arrangements:

• Self-Service: online for liabilities under £30,000, agreed within 60 days of payment due, no overdue returns.
• Negotiated: phone HMRC for liabilities above £30,000 or longer arrangements.
• Typical arrangement: monthly instalments over 3-12 months.
• Interest continues to accrue at the prevailing rate (currently 7.75%).
• Late payment surcharges may still apply unless agreed before the surcharge trigger.

Careless vs deliberate errors: penalty grading

HMRC penalties for inaccurate returns are graded by behaviour:

Tax investigation insurance

Tax investigation insurance covers the professional fees of fighting an HMRC enquiry:

• Typical premium: £100-£300 per year for an individual; £400-£800 for limited company directors.
• Coverage: accountancy fees up to £100k-£250k for fighting a routine enquiry, full investigation, or tribunal.
• Excludes: tax actually owed, penalties, interest. Only the professional fees.
• Most worthwhile for: high-earners, sole traders with complex affairs, landlords with multiple properties, anyone with foreign income or crypto.

For a typical Harrow filer with rental income or self-employment above £40,000, tax investigation insurance pays for itself with a single straightforward enquiry. For PAYE-only filers it is rarely worth the premium.