Those brown HMRC envelopes rarely contain good news and sometimes fill the recipient with absolute dread when it announces a tax audit or investigation. A routine tax audit can happen to many businesses but if HMRC suspects inaccuracies in your tax return, it will launch an investigation which can cause much stress, take up a lot of time and ultimately require a bill and fines to be paid.
VAT-registered companies and those with employees on PAYE can expect a routine tax enquiry to check records and systems, especially if mistakes are regular on the tax return. Your accountant will be able to check your records and make sure that you can provide accurate information when the inspector calls. On the other hand, we have known VAT registered businesses go decades without formal review by HMRC, so this is by no means a given.
If you receive a letter outlining an investigation, it’s advisable to seek professional help from CRM or another qualified accountant as soon as possible. There is business insurance cover available for the costs of a tax investigation and some business associations offer this as a benefit. The most common reasons for a tax investigation are:
- Your returns show ongoing unprofitability
- Your returns include regular mistakes or are regularly late
- Large fluctuations in reported income or business expenses
- Your figures look dramatically different to other businesses in your industry
- A tip-off, or other data held by HMRC (e.g. land registry, details of interest paid by banks etc)
- Your company directors’ earnings do not correlate with their lifestyle
- Suspicion of omitted income
- Offshore bank accounts and income from property
What does a tax investigation entail?
The letter you receive from HMRC will outline the area of your tax return that it is investigating (an aspect enquiry) or whether it considers there is a high risk of irregularity (a full enquiry). The enquiry must begin within a year after you submitted your return, or the first anniversary of the next quarter date after submission if you missed the deadline date.
A tax investigation can often last for many months and may expand into the personal tax affairs of directors. Working with your accountant, deal with requests for documents and information in writing so that you have a record of everything coming and going.
HMRC will set out the documentation and evidence that it wants to investigate, this could include:
- Information on the taxes you pay (possibly going beyond income and corporation taxes)
- Details of your tax calculations and your books
- Annual returns of a limited company and self-assessment returns of directors
- Self-assessment returns of a sole trader
- PAYE records
What does HMRC do on a visit?
There are set procedures that HMRC follows when it visits and you can request a copy of these before the visit. The investigation might take place at your workplace, your home, your accountant’s office or at HMRC. The details of what will be discussed are also available before the meeting and the agenda must be adhered to. It is important that you provide all the information requested and that you answer every question fully.
What happens next?
After the investigation, HMRC will explain the findings. If no negligence or fraud is determined, you have 30 days to correct any errors discovered. In the case of negligence or fraud, there will be penalties, tax and interest to pay and you may have to sign a contract to avoid prosecution.
The best way to avoid a tax inspection is to make sure that your records and returns are entirely correct submitted on time, and the best way to achieve that is to use an expert accountant who can guide you through the twists and turns. We can also ensure that in the event of being selected for an enquiry by HMRC that you are protected from the professional costs of defence by joining our Tax Investigation Service from as little as £120+VAT for a year. At CRM we pride ourselves on straightforward, high-quality tax advice, call us on 01865 379272.