What Is A HMRC Tax Investigation?
Any business at any time may find themselves subject to a tax investigation by HMRC. The aim of tax investigations is to ensure that all businesses in the UK, or who have a UK branch or office, are paying the correct amount of tax. Tax investigations may sound alarming, but if you have filed all of your accounts correctly, you cooperate fully with HMRC and if you engage some experienced professional advice and assistance throughout the process, then they don’t need to be scary as you might first think.
Handpicked Accountants can connect you with a number of accountancy firms in your area that have extensive experience of assisting their clients with the requirements of a HMRC tax investigation - and you can rest assured that each firm the we recommend has been thoroughly vetted to ensure that you will be working with only the very best firms available.
Why am I being investigated?
There are a number of different reasons why you may be subject to a HMRC tax investigation. HMRC is not required to disclose the reason for an investigation but common triggers can include:
- Regular mistakes on your tax returns - HMRC accepts that genuine, one-off mistakes happen, however if you are regularly submitting incorrect tax returns then this could cause HMRC to become suspicious and feel the need to investigate matters further.
- Tip-offs - although HMRC will never admit to a tip-off being the reason for an investigation, it is commonly accepted that this can be the cause. Common aggravators for tip-offs include disgruntled employees, partners or other associates who are aware of dodgy tax practices, people being aware of a cash-only policy in your business, or it being obvious that you are living a lifestyle beyond your claimed means.
- Continued unprofitability - many businesses, especially in the first few years, may fail to turn a profit. However if you are continually submitting tax returns that say that you don’t owe any tax at all, this could prompt HMRC to investigate your situation further.
- Large inconsistencies year on year - most businesses will make varying amounts of profit/loss across a period of years, however very large fluctuations could set alarm bells ringing. If there is a genuine reason for these fluctuating figures, use the notes section on your tax return to explain this and thus ease suspicion.
- Your figures buck industry trends - HMRC tends to know on average how much a company of your size and in your industry should be making. So if your figures are either significantly higher or lower than this it could raise suspicion.
- Directors are earning less than employees - if, once salary and dividends etc have been combined, the directors of your company are still earning a surprisingly small amount, then this could cause HMRC to suspect that you are pulling further profits out of the company through illegal tax avoidance schemes.
- You do not have an accountant - in many cases not having a finance professional looking after your books can cause HMRC to become suspicious as it may be a marker that you have something to hide.
- Simple bad luck - there is also always the possibility that you may simply be targeted for a random tax inspection. Although we believe that random inspections are generally in the minority, they do still exist and you could simply be at the mercy of fate.
What types of investigations are there?
There are 2 types of HMRC tax investigation:
- Full - if HMRC believes that there has been a significant error in the tax return then they will conduct a full investigation. This will include reviewing all of your business as well as any director’s personal financial records. These can typically take up to 16 months to complete and can cost around £5,000 in accountant’s fees.
- Aspect - here HMRC will only be concerned with a certain part, or parts, of your accountants. These are often conducted when there is suspicion that a genuine mistake has been made on your tax return. These typically last between 3-6 months, but can sometimes take longer.
What is involved in a HMRC tax investigation?
Initially you will be contacted by HMRC by letter, informing you that you are being subject to a tax investigation. This letter will also include the request for the information or any documentation that they require. You are legally obliged to produce this information, so it is important that you respond to the letter as soon as possible. We would also recommend engaging the services of an accountant who is experienced in handling tax investigations, as they will be able to gather and supply the required information in a swifter and more succinct manner.
If you feel that the investigation is unfair or unfounded then you do have the right to appeal, where you can ask for the enquiry to be listed as a personal hearing before the First Tier Tribunal to make an application for a closure notice, although again professional advice will be very useful here.
Once the investigation has been opened then you must comply with all of HMRC’s requests for information. If HMRC feel that you are delaying providing this then they are able to serve a Schedule 36 FA 2008 Information Notice, which orders you to produce the required documents. If you do not comply with this you may be liable to a monetary penalty.
What will a HMRC tax investigation look at?
There are a number of factors which could be audited during an investigation. These could include; VAT, PAYE, record keeping practices, roles within the business, invoicing, bank procedures, business receipts, payment of expenses, director’s personal and private income vs expenditure and many other financial details.
It is important that you can quickly, easily and clearly provide all of these details, as not only will this allow the investigation to progress more swiftly and smoothly, but it will prove to HMRC that you have nothing to hide and that you keep accurate and honest financial records. HMRC will want to inspect your current and previous year’s records, but may also want to look at records stretching back up to 20 years, although most commonly this will be around 6 years.
What are the potential outcomes of a HMRC tax investigation?
There are 3 potential outcomes of a tax investigation:
- No adjustments - the investigation has proved that the tax return submitted was correct, and the investigation will be closed with no further action required.
- Minor adjustments - if a discrepancy (either for overpaid or underpaid tax) has been discovered but is deemed to be the result of a genuine mistake then HMRC will provide you with details of this is writing and remuneration will be required, usually with interest. If the adjustment is due to a deliberate action on your part then you may be liable for a penalty, which is usually calculated as a percentage of HMRC’s ‘Potential Lost Revenue’.
- Larger adjustments - if a serious error has been discovered, HMRC will often assume that similar errors will have been made on previous tax returns and so may demand that adjustments are made to cover these as well. If the error was deemed to be the result of carelessness then they can demand payments be made for up to 6 previous years, however if the error was believed to be deliberate then then HMRC are able to go back for 20 years.
How can I avoid being subject to a HMRC tax investigation?
As we have already stated, in some cases you can’t avoid a random HMRC tax investigation. However there is a simple way to avoid raising HMRC’s suspicion - ensure that you record and submit all of your accounts completely fairly and honestly. Engaging the services of a good accountant will mean that they will keep control of your finances and can arrange them in such a way that you pay the minimum amount of tax required, but in a completely legal and compliant manner.
Contact Handpicked Accountants and we can find your perfect accountant today.