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“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’.

What is an HMRC Tax Investigation?

A Tax Investigation is a detailed investigation into your tax payment history. A Tax Investigation is conducted by the relevant Tax Authority.  In the UK it is conducted by the HMRC (Her Majesty’s Revenue and Customs).  It is usually carried out when a taxpayer is suspected of tax evasion, or by a random investigation.  This means, no matter how much you can try and prevent an investigation, you may still be targeted. 

They will generally investigate a number of taxes:

  • Income Tax
  • VAT
  • Capital Gains Tax
  • IR35 linked to contractor’s contracts
  • Construction Industry Scheme

What types of Tax Investigations are there?

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.

How long does a Tax Investigation Take?

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.

How far back can HMRC go?

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.

How likely is a Tax Investigation?

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.

What should I expect in a Tax Investigation?

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 investigation letter will outline what the HMRC will be investigating.  This will usually include areas such as:
  • Your Company Tax Return
  • Your Accounts and Tax Calculations
  • If you’re VAT registered your VAT Returns
  • Your Self-Assessment Tax Return
  • If you’re an Employer, your PAYE records
  • The Tax that your pay

The HMRC investigation team can:

  • Visit third parties
  • Ask to see books and accountancy records (and remove this for examination)
  • Interview owners and staff
  • Search computer records

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.

What happens after an HMRC investigation?

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:

  • Regular mistakes and inconsistencies on Tax Returns. One mistake is generally OK, however, if this happens on each return, HMRC will get suspicious
  • Years of Unprofitability. If this is the case, inform the HMRC the reasons
  • If the Sector you’re working in is High Risk. The most common example is businesses who handle a lot of cash or a Sector that the Revenue is specifically targeting.
  • A Tip-Off from somebody alerting HMRC of your business and potential unusual activity. You may need to be wary of disgruntled employees, ex-partners or if you are living a lifestyle significantly beyond your means.
  • Figures are inconsistent with normal industry benchmarks, or similar business in your industry. HMRC will generally know, the norm for each industry and each sized business.  They will usually investigate any significant discrepancies.
  • You manage your own Business Accounts and don’t have Financial representation from a third party, most notably an accountant. This could highlight mistakes are more likely, or that you don’t want an outsider seeing your finances.
  • They suspect you may be omitting Income. This may have been flagged with another business you deal with reporting income, that you may have not.
  • Business Directors earn less than Employees. Try and maintain the
  • Large fluctuations in the numbers you submit. You are given the opportunity to provide commentary as to the reasons we why in your tax returns, we suggest you do this.
  • You have Offshore Bank Accounts, meaning there may potentially be some Tax Avoidance.
  • Excessive expenses compared to your level of turnover
  • Lack of clarity and no explanations around any spike in turnover, unexplained adjustments or unusual balances

Top 3 Tips to Avoid Tax Investigation

1) Bookkeeping – Keep your Books up to date and accurate

  • Use an Accountancy Software Solution such as XERO or Sage to automate your finances. Make sure your bank account balance matches that shown in the software
  • Keep copies of all the invoices you receive
  • Keep receipts for all costs.  You could use an accountancy tool such as Receipt Bank where you can simply take a picture of the receipt which log

2) Recordkeeping – Keep your Accounts as Accurate as possible and avoid basic accountancy errors

  • Having an accountant or other professional advice will help minimise errors.
  • Make sure you enter all correct details such as VAT, allocate costs to the right category or bank payments, match receipts to the right invoice etc. As above an Accountancy Software package will help reduce errors

3) Submit VAT Returns and Self-Assessments on time

  • This will increase the likelihood of accurate accounts and reduce the likelihood of being selected for a Random Enquiry.
  • Include notes and commentary on any discrepancies or unexplained adjustments

Top 3 Tips During a Tax Investigation

1) Keep a Cool Head

  • It’s important to keep calm and resist the temptation to call HMRC. Contact your accountant or a Tax Specialist.  They will advise you what to do next and help you through the process.

2) Be honest and Tell the Truth

  • This applies with liaisons with your accountant / Tax Specialist and the HMRC.

3) Work with HMRC the best you can

  • HMRC will often suggest deadlines for certain information.  It is recommended you meet these deadlines
  • The Revenue may and also suggest a meeting.  If you are open to attending a meeting, ask for an agenda so you can prepare in advance, and take notes.
  • Make sure you cooperative with them as much as possible.  This will ensure the process runs as smoothly and quickly as possible.  It also means you will minimise the possibility of potential penalties.

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.

Nigel Carr
Nigel Carr
Nigel is a freelance financial writer and Author at Kinsella Tax. A business graduate he writes on financial matters as well as music for a number of high quality websites.
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