Tax investigations can be stressful, even for the most cautious business owners. The fact that HMRC could end up searching through your facts and figures leaves you questioning every tax return, invoice and expense claim you’ve ever made.
To make the thought of being investigated less stressful for you, we’ve put together a guide of what to expect when it comes to HMRC tax investigations.
What is a tax investigation?
A tax investigation is an in-depth investigation made by a tax authority in order to recover tax undercharged in previous years of assessment. This is carried out when a taxpayer is suspected of tax evasion, or simply through random selection.
In simple terms, a tax investigation is a financial audit conducted by HMRC.
How do HMRC decide who to investigate?
HMRC claims compliance checks are usually triggered when figures submitted on a return appear to be incorrect. For instance, if a small business makes a large claim for VAT, or a company with a large turnover declares a surprisingly small amount of tax, this will likely be picked up by HMRC.
Although, there are some added points that we’ve seen make businesses become a target of a tax investigation:
- Your tax returns are filed consistently late
- You work in a high-risk industry with routine cash payments
- Your costs are above the industry normal/expected
- You work in a sector that HMRC has decided to target
- You have a big fall in income and increase in costs
- HMRC receives confidential information about your business
An important thing to remember: Investigations can be completely random, so don’t panic if you’re being investigated.
How do I know if HMRC are investigating me?
You won’t be notified by HMRC when they begin looking into your figures. However, if they decide to formally investigate you, you’ll receive a letter from one of their departments asking for more information. This may include information on your latest tax return, or information regarding a property transaction.
If HMRC believe that criminal activity has occurred, such as tax evasion or fraud, they may open a criminal investigation. You will not be aware of this until you’re either arrested or receive a letter requesting you to attend an interview under caution.
What happens during a HMRC tax investigation?
There are three different tax investigation processes that HMRC follow. The detail and amount of information they request varies on the type of tax investigation you face.
- Random Enquiry – HMRC will conduct a variety of randomised checks on the financials of your business.
- Full Enquiry – HMRC will investigate all aspects of your tax and tax history.
- Aspect Enquiry – HMRC will look at one aspect of your tax. This could be your income tax for instance.
Once HMRC have all the information needed, the investigation will begin. They’ll check that your accounts are in line with other aspects of spending and ask you various questions about finances. By doing this, HMRC are making sure numbers haven’t been missed and everything is as expected.
For you as the business owner, a tax investigation is simple. Jut provide HMRC with the information requested and answer any questions they may have.
How long do tax investigations take?
The length of a tax investigation depends on many things. Whether it’s a full enquiry or a quick look into your documents, the severity of the problems found, how well your records are kept, the size of your business, and how prompt you are with your responses.
As a rough guide, small businesses with good accounting and business records can be investigated for as little as three months. However, if there’s evidence of problems like tax fraud or tax evasion or have been running a large business for many years, a tax investigation can become a very time-consuming process, lasting anywhere up to two years.
Preparing for tax investigations
The best way to prepare for a random tax investigation, or to ensure HMRC don’t find any problems with your business’s financial records, is to partner with a qualified accountant. At HL&W, we work closely with professional financial advisers to ensure tax returns are completed accurately and submitted on time. As authorised agents of your company, we’ll also receive and deal with all HMRC correspondence. Meaning in the case that you are investigated, we’ll take the responsibility into our own hands, freeing up your time. Our HMRC correspondence also helps you avoid issues relating to missing deadlines.
If you’re looking for an accountant to help your business stay clear of tax investigations, contact us at HL&W today. We’d love to let you know what we can do for you and your company.