A HMRC tax investigation can be nerve-racking for any business, however, there are some
things you can do to help make the process as easy as possible. Here we have produced an
article full of tips and advice to help you understand HMRC tax investigations and how to
deal with them, so read on to find out more.
What is a HMRC Tax Investigation and what triggers one?
A HMRC tax investigation is an enquiry into your tax payment history. If your business is
chosen, you will receive either a letter or phone call from HMRC advising you of what they
would like to have a look at, such as
Your accounts and tax calculations
Your Company Tax Return
Your VAT returns and records (if VAT registered)
Your Self-Assessment Tax Return for a particular year
A few different factors could make your business more likely to be investigated, such as
Working in an industry that is deemed ‘high risk’ eg a business where lots of ‘cash in hand’ transactions take place
Submitting incorrect figures on a tax return, or continuously filing your returns late
HMRC receiving a tip-off about your company
Your costs being above the industry norm
If you use an accountant, it is possible that they will be contacted by HMRC instead of you,
but your accountant will soon contact you to tell you about it.
The Three Different Types Of Tax Investigation
Full Enquiry
During a full enquiry, HMRC will look at the entirety of your records as they
most likely believe that there is a significant risk of error in your tax return. This might
include personal financial records of business owners as well as business records.
Aspect Enquiry
When a business is subject to an aspect enquiry, HMRC will investigate a
particular part of your accounts. An example of this would be inaccuracies on your most
recent tax return. Often in this type of enquiry, the outcome points to an authentic mistake
or misunderstanding rather than an intentional attempt to evade tax.
Random Enquiry
As the name suggests, a random enquiry is purely random. HMRC will
choose a selection of businesses to investigate, regardless of the state of your accounts.
What Is Involved In The Tax Investigation Procedure?
Throughout the investigation, HMRC will audit your accounts and ask you a variety of
questions. They might also ask to meet with you in person, either at your home, at your
business address or at your accountant’s business address.
Some people believe that HMRC is only interested in investigating income tax, but that is
not the case. Other areas of taxation that HMRC might want to investigate include…
Corporation tax
VAT
Construction industry scheme
Capital gains tax
IR35
Insurance premium tax
If your business has complex tax affairs, it is wise to invest in accounting software, as this
will make it easier for you to check that your accounts are in order.
How Can I Prepare For A Tax Investigation?
It is important to note that a tax investigation will take up a significant amount of your time
and attention. Treat this like any other business project, as this is an important and
thorough process that needs working through step by step.
You may want to request some assistance, possibly in the form of extra accounting help. It
could also be a good idea to get somebody else to take on some of your responsibilities, as
you will not be able to dedicate as much time to your business as you normally would.
Ensure to set aside the required time and resources, and that all of your records are in
order. The more information you have, the better, and it will likely increase the chances of a
positive outcome for your business. If you take the time to gather the necessary
information, you won’t need to stressfully hunt for things later on.
Some Tips For Keeping Your Accounts In Order
Don’t delay doing your paperwork, keep your books up to date. This is vital for two reasons, HMRC requires you to do so, and it’s important to know what’s going on with your business finances.
Ensure that the bank account balance is the same as the balance shown in your accounting software.
Keep copies of invoices for all money you have received
Keep the receipts for all business costs
Become aware of the basic accounting errors that can trigger a tax investigation, such as allocating costs to the wrong category, matching receipts to the wrong invoice, or entering the incorrect amount of VAT. That way you will know what to look out for and what to avoid doing.
File Self-Assessment and VAT returns on time. HMRC will be more likely to review your accounts if you submit VAT or tax returns late.
What Are The Potential Outcomes?
The outcome will depend on what HMRC discovers. Some common outcomes include…
Underpaid tax – The taxpayer will be formally required to pay any tax they owe within 30 days, with the possibility that interest could be added.
Overpaid tax – The taxpayer will receive a tax rebate with added interest.
Intentional wrongdoing – If HMRC concludes that the taxpayer perpetrated intentional wrongdoing, HMRC could heighten the case to criminal status. If this happens, you must pay a penalty, with the amount depending on factors such as why you overclaimed or underpaid tax, when you contacted HMRC, and if you cooperated throughout the enquiry.
When Does An Investigation End?
There is no exact time frame for how long a tax investigation will take. The end of the
investigation will be marked by either a decision notice or agreeing on a contract settlement. Decision notices are often received in the form of a letter, and they will detail what the final position is. The letter may also include an assessment or penalty notice.
A contract settlement is a legal agreement between the taxpayer and HMRC, where the
taxpayer agrees to pay the money required and HMRC agrees not to use their powers to
recover the money. Once a return has been investigated, it is not allowed to be investigated
again.
Tax Investigation Insurance
A HMRC tax audit can be a long and drawn-out process that takes, like anything in business, time and money. Some of this cost can be offset by purchasing Tax investigation insurance. Tax investigation insurance gives you peace of mind that when HMRC come knocking you won't be left with the bill for all the extra account costs accused during the audit.
Thank You For Reading
If you’ve got up to this point of the article, then thank you! We hope that you feel you have
gained much more knowledge about tax investigations. We also hope that we have put your
mind at rest if you have had any previous fears regarding tax investigations.
If you would like the help of an accountant, contact us today. As well as offering services
such as accountancy, bookkeeping and payroll, we also have lots of experience in dealing
with tax. So, if you’d like some tax advice or assistance with anything above, book a free 30-
minute consultation call with us today. We are so excited to start working with you.