Surviving an HMRC tax investigation
Is HMRC after you and your business?
If you have to prepare and file tax returns you have good reason to expect and be paranoid about an investigation by HM Revenue & Customs. HMRC has more powers than ever, so businesses are under closer scrutiny and the number of tax investigations in the UK is on the increase.
A tax investigation can be triggered by a discrepancy in your figures or may result from a completely random check. Whatever the cause, an investigation is usually extremely complex, time-consuming and stressful. So unless you are very sure of your position, our recommendation is that you should take professional advice as soon as a tax investigation or inspection starts.
You’re under the microscope
With revolutions in information technology and the government’s Making Tax Digital strategy, HMRC’s powers to scrutinise your business are increasing all the time, meaning businesses are under the microscope more than ever. In a bid to find unpaid taxes, the taxman already has the capability to trawl through billions of items of personal financial information from dozens of sources.
In addition, the tax authorities now have increased powers to search premises and can even extract information from third parties to build their case against you. And with businesses currently required to file returns online, HMRC can use advanced software to analyse your returns and compare them with industry averages. Software developments mean that soon the taxman will be able to access even more areas of your personal financial information, including information gathered from social media.
And forget any old ideas about the burden of proof. If the taxman decides to visit, you’re guilty until proven innocent. It seems that nowadays there’s nowhere to hide.
So what triggers a tax investigation?
Only around 7% of tax investigations are a result of random factors. Instead, the vast majority are due to a discrepancy where HMRC believes that something is wrong with your tax return. Ratio analysis is an increasingly important weapon in HMRC’s armoury – this means that alarm bells ring if a company’s figures show a high degree of fluctuation from year to year, or if your business has been displaying suspicious activity - for example, unexpectedly high turnover.
How do you lower your chances of being investigated?
- Take care when filing tax returns: HMRC does not accept mistakes or ignorance as excuses. So make sure your files are accurate and complete and use the blank space in your tax returns to explain any unusual fluctuations in turnover or profit.
- File your tax return on time: A late return will not only incur a penalty charge, it will also draw attention to your data and increase the likelihood of your business being investigated.
- Pay your taxes on time: It’s all about keeping your head below the parapet, so you should always pay your tax well in advance to allow for your payment to be processed.
- Make sure your files and records up to date and accurate: Always keep clear financial records so that you’re fully prepared should the tax man come knocking.
- Keep both hard and electronic copies: Retain copies of invoices, receipts, business bank statements and any other relevant documents and retain copies of your accounts going back at least six years.
- Honesty is the best policy: There’s really little point in attempting to conceal information or use illegal tax avoidance tactics, as they will be uncovered. And ask yourself the question – is deception really worth all the stress and anxiety, especially if a random tax investigation takes place?
What happens in a tax investigation?
Be prepared for a very stressful time. A full inspection will usually start with you receiving a letter instructing you on what you need to hand over. What you need to provide will depend on what they are investigating. HMRC will then take all of your records, go through them in detail, then come back with questions.
A tax investigation can go on for months, even a year or more, and it can potentially cost thousands of pounds in accountancy fees. In addition, the penalties can be raised up to 100% of the tax that was supposed to be paid. However, this may be reduced if it was due to an honest mistake. Investigations usually delve back one year into your business accounts. However, if HMRC suspects any dishonesty, it is empowered to go back 20 years, although this is usually restricted to six years.
It is possible to go to prison for tax offences, particularly in cases where large amounts of PAYE and VAT are concerned, but HMRC usually seeks civil penalties.
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