Tax Investigations

The stress of a tax investigation

A tax investigation can quickly turn into one of the most stressful things you ever deal with whilst running a small business.

Even when there is absolutely nothing wrong with your tax affairs you can still be chosen for an HMRC enquiry completely at random, and any investigation can drag on for months regardless of the reason why it was started.

There are more than 250,000 tax enquiries every year in the UK.

HMRC will deal with ourselves, in our position of being your accountant much of the time, but you may also be asked to answer some questions directly, or even attend a meeting.

When is a tax investigation started?

A tax investigation can start at any time but in normal circumstances, unless there is serious fraud involved, HMRC must begin their enquiry within 12 months of a tax return being submitted.

But getting past this initial deadline doesn't mean that you are forever in the clear.

If HMRC enquire into any tax return at any time and find errors they can then re-visit earlier years and look at those as well.

The obvious solution to offer the most peace of mind is to ensure that every tax return you ever submit is correct and complete as far as you are aware.

If you are selected for a tax investigation HMRC will write to you to tell you if it is going to be a check of your entire tax return and business records or a more specific and limited check on a particular part of the return or about a claim you have made.

Compliance checks

Sometimes HMRC won't start a tax investigation but will ask to carry out a compliance check on your business instead.

It's a fine dividing line between the two, but in theory at least, a compliance check is simpler and quicker. 

HMRC will usually give you at least one weeks notice of their intention to make a compliance visit to your business, although it is not unknown for them to arrive completely unannounced.

The problem with compliance checks is that if HMRC find things they believe to be incorrect or unclear they can soon escalate the visit into a full blown tax investigation.

To avoid this it is extremely important to have up to date and accurate business records available during a compliance visit.

You should also be able to demonstrate that your business has satisfactory procedures to prevent fraud or incomplete records being produced.

What to expect during a tax investigation

It will be clear from the length of or details requested in HMRC's opening letter to you if you are going to be subjected to a full enquiry or an aspect enquiry into just a small part of your tax return.

You won't know (and HMRC won't ever tell you) if you have been chosen randomly or because of information HMRC have obtained.

HMRC have many ways of obtaining information about your business and use sources such as:

  • Your suppliers, especially wholesalers business records
  • Your customers business records
  • Your submitted tax, vat or payroll forms
  • Other individuals or organisations providing them with information about suspected tax frauds - do you have problems with your neighbours? Are you divorced? There are often more people than you may imagine who would like to report you, even if their accusations are false.
  • Information obtained directly from banks and building societies

The tax investigation could be based on information HMRC already hold or on nothing at all (random).  Added to that, tax inspectors won't ever tell you what they already know. 

How you might avoid a tax investigation

Make sure that your tax return is as complete and accurate as possible. Consistently sending a tax return full of provisional figures or estimates will only lead to trouble in the long run.

Explain fully any unusual figures on your tax return.  Many small business owners are reluctant to provide anything more than the bare minimum of information. But this can sometimes result in an unnecessary tax enquiry if there is something unusual about the entries on your tax return. 

Tax returns are initially processed by a computer program that looks for anything unusual or unexpected in the figures. If something odd is found your tax return will be added to an Inspector's list of potential enquiries. 

But your odd figures could have a perfectly innocent explanation. For example sales may be low because of long term illness, perhaps you introduced an inheritance into the business, or your profit margins have been hit by strong competition.  All these types of situations can be explained in the white spaces provided on the tax return. 

Providing accounting records

Accounting records you will be expected to provide include:

  • bank statements
  • sales invoices
  • purchase invoices
  • supplier statements
  • cheque stubs and paying in books
  • diaries and work schedules

You should only be asked to provide information that is reasonable and relevant to the tax investigation.

Deadlines and commitments

Each time you receive correspondence from HMRC during a tax investigation it will state the date by which the inspector expects a reply.

It is important to try your best to reply in time as it aids your score for co-operation.

If it is clear that the level of information requested will mean you cannot meet the deadline then let the inspector know this and provide a date by which you will provide the information.

Next steps

If you have any questions about tax investigations please contact us.

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