“We are going to Investigate Your Tax Affairs”. This is the dreaded news any business owner does not want to hear. The most important bit of advice if this happens to you is to keep a cool head. Although far from ideal, more often than not the situation isn’t quite as stressful as you may think, especially if you have the right support.
In a lot of cases, the person being investigated has done nothing wrong. They will however still need to manage their side of the investigation. Tax Investigations can be stressful which is why the first thing you need to do is to take advice. Contact a professional straight away to help you manage the situation.
One bit of good news is HMRC very rarely come knocking at your door unannounced. They will normally give you advance notice that your business is to be investigated through an ‘Information Notice’.
They will generally investigate a number of taxes:
There are essentially three different levels of HMRC enquiry
Full Enquiry – This is where HMRC investigates the whole of your tax return and your business records. This is usually where HMRC believes there is a high risk of errors on your returns. The Revenue will look through all of your business records. They may also investigate the personal records of directors associated with the company.
Aspect Enquiry – An Aspect Enquiry occurs when HMRC want to assess one or more areas of your tax information. This is usually the case for genuine mistakes, discrepancies and some form of inconsistency.
Random Enquiry – As the name suggests, a random enquiry can happen at any time. These are usually aimed at SMEs or higher risk tax sectors.
It varies depending on the type of investigation, and it’s complexity. It can take 3-6 months for an Aspect Enquiry, where only one area is being investigated. A full enquiry investigation is more complex and takes on average 16-18 months.
In normal circumstances, HMRC will go back 4 years. If somebody has submitted tax returns strewn with mistakes HMRC can go back 6 years. For more serious cases where HMRC believe there has been a deliberate tax avoidance or tax fraud, they can go back 20 year’s worth of tax returns.
If you are VAT registered or pay employees through PAYE, you should expect routine Tax Audits. Routine investigations are less likely with income tax and corporation tax. The likelihood of investigations increases if the Revenue believes tax is being underpaid, whether that be from genuine errors or deliberately not revealing all income earnings. Some experts have suggested up to 2% of all business and sole traders are investigated each year in the UK. On average, investigations can be anticipated every five years or so.
The first initial contact should come via an ‘Information Notice’ that will be sent to you or your Accountants. They will specify the type of investigation and also which areas are to be scrutinised.
The HMRC investigation team can:
The HMRC will thoroughly audit your accounts and will ask you a number of detailed questions. They may request to visit you in person, or they may be happy to conduct questions over the phone or via email/letter. Each case is different but it’s important to assist in the best way possible and provide information when requested. They can’t legally force you to attend meetings, but it’s important you cooperate to help things move as smoothly and quickly as possible.
HMRC will tell you the information they need prior to a visit. You may ask for a specific agenda prior to the visit, which the HMRC must adhere to and not deviate from. It’s important you give a complete and accurate picture.
Everything you tell the HMRC could impact the outcome of the investigation, so you need to bear that in mind when you’re corresponding with them.
As soon as the investigation is complete, HMRC will contact you to let you know the outcome.
If they have found a discrepancy in your returns, but they don’t believe it was done fraudulently or negligently, they’ll advise on how the return needs to be amended. They will give you 30 days to make the amend. If you have made an innocent mistake but you’ve done everything you can to rectify it, you may not incur a penalty, but just pay the tax you owe. If you are penalised it maybe around 15% of the tax due.
Alternatively, if they consider you to have acted with negligence or fraudulently, you’ll be made to pay in extra tax, and interest. It may be up to 70% of the tax due. You may be expected to sign a contract pledging to pay in exchange for the Revenue not prosecuting you.
Prevention is better than cure – What might trigger an HMRC investigation?
HMRC will never say exactly what triggers are tax investigation and they are also reluctant to publish the criteria they trigger an investigation. Most investigation are triggered where the HMRC may feel something is out of place, or not quite right. This is why it’s important to have professional financial advice when compiling and submitting tax returns.
Here are a few triggers we know about:
Get in touch with us if you need advice on avoiding a Tax Investigation, or if you are the subject of an investigation. We have a team of experts on hand or will help guide you through the process. Call one of our team on 0800 471 4546.