Learning of an upcoming tax inspection is enough to strike fear in the heart of any business owner. Whilst some investigations are triggered at random, as a way for HMRC to ensure good practices, The vast majority happen due to some sort of discrepancy that is noticed within your tax return. Of course, it’s easy to make a mistake when completing self-assessment but this can still show up on HMRC’s radar- ignorance is not a defence.
When HMRC notices a specific inconsistency, for example fluctuations in turnover or expenses, they may choose to conduct an enquiry, before committing to a full investigation. However, it’s very easy for things to escalate, leading to a full-blown audit.
Tax inspections can be expensive and require valuable time and effort that could be used elsewhere. In fact, the process can last anywhere from a few months to two years. With this in mind, how can a business prepare for a tax investigation.
It may seem like an obvious point, but the best way for a company to prepare for a tax inspection is to ensure that it doesn’t happen in the first place. Assuming there is no deliberate wrongdoing, avoiding errors in your return is the easiest way to ensure you aren’t flagged by HMRC. This means thorough record-keeping throughout the working year and attention to detail when completing self-assessment. If you work with an accountant, make sure that they are reputable and have your best interests at heart.
Another way to avoid inspection is to explain any changes within your business that may raise suspicion. HMRC give you the opportunity to do this during self-assessment and this shouldn’t be overlooked. If there has been a noticeable change within your business and this is showing up within your return, tackle this proactively and include relevant details.
These tips are particularly pertinent for those working within industries that are more commonly investigated by HMRC, for example construction.
Type of Investigation
There are three main types of investigation that HMRC can conduct, each with its own implications.
The first type of investigation is random and should be relatively straightforward, assuming your records are in order.
The second type is known as an aspect enquiry and is focused on an individual part or parts of your return. This is the type of investigation that is usually triggered by an innocent mistake or error and therefore shouldn’t be too comprehensive.
The most serious type of investigation is a full enquiry and this is undertaken when HMRC believe there is evidence of a significant error or fraud. This type of investigation will often include full review of all records, of both the business and business owner.
HMRC will notify businesses when they’re conducting any type of investigation into their taxes. They’ll outline why they’re investigating and will usually ask for further information and records. Standard investigations tend look at the previous tax year alone, however if HMRC believe a serious error has taken place, they may look back further, potentially over multiple years.
In terms of the timeline, an investigation will usually begin within 12 months of the return in question- whether that be a year after the due date or a year after the payment was made.
Upon notification, businesses can appeal to HMRC immediately, for example if they believe a small clerical error is the issue.
Investigations can be relatively short or go on for many months, depending on the circumstances. Once HMRC has checked records and come to a decision, it may be a simple case of paying any overdue tax or conversely, you may be owed tax by them.
However, if they believe that deliberate wrongdoing has taken place, HMRC may bring in criminal proceedings. Once the investigation is included, they will send the company owner a decision notice which will detail findings and any relevant penalties. The recipient and HMRC will then have to come to some sort of agreement, outlining any repayments that need to be made, otherwise known as a contract settlement.
It can be easy to feel overwhelmed when under a tax investigation, particularly if you’re a newer or smaller business. Experts at Taxation Investigation have a wealth of experience within this area and can help any business who may be under scrutiny by HMRC.