Over the past few years the chances of businesses being investigated by HM Revenue & Customs (HMRC) have increased considerably.
In October 2010, the UK’s coalition Government announced plans to apportion £900 million to target tax fraud in its spending review, in a bid to recover a £7 billion deficit in public finances.
Large companies are being examined more closely and private debt collectors have been instructed to help recuperate lost revenue.
But what impact does this have on small businesses? Should small business owners be worrying about the possibility of defending themselves against a HMRC investigation?
Ex-tax inspector Nicholas Parkes believes that anybody running a business – no matter what size – should be concerned. He adds: “In the Revenue, we always believed you could pick up any file and find something.”
So what actually prompts a tax investigation?
Mr Parkes states that over 7% of tax investigations are triggered by chance “so HMRC can check that they are targeting their inspections properly and also so that nobody feels safe”.
Yet the overwhelming majority happen when HMRC strongly suspects that there’s something amiss.
The theory is quite simple: companies that keep clear, concise records and declare everything should be safe. But, when errors arise, ignorance is no defence, so it is imperative that businesses are conscious of completing their returns on time.
In even simpler terms, don’t give HMRC a reason to suspect any wrongdoing!
Another trigger is abnormal fluctuations in figures – where a business’ figures drastically change from one year to the next. Though, these queries are more likely to lead to an “aspect enquiry” rather than an investigation.
Maybe you own a company that specialises in property lettings and your repair or maintenance expenses are very high one year; HMRC may want to find out why!
It is important that every business uses the extra space on their tax return form to full effect by explaining any anomalies in turnover or profit. If you cover all bases, then you shouldn’t have any reason for concern.
Good records, tidy accounts and clear tax returns
HMRC have gained more power in recent years and can now use information from third parties, stricter penalty regulations and even the right to search premises to their advantage – placing businesses under greater levels of scrutiny than ever before.
In addition to this, all companies are now legally obligated to file their tax returns online; allowing HMRC to use its own proprietary software to evaluate these documents and compare them with sector averages.
So what other factors can trigger an investigation? Well, cash-based businesses and companies within construction industry are notorious for raising eyebrows with HMRC.
And a lot can depend on the credibility and skills of your accountant. If your accountant is meticulous and able to spot potential obstacles, then this will stand you in good stead. However, you can’t put all of your eggs in one basket – an accountant’s work is only as good as the records they are handed over.
What happens in a tax inspection?
If your business is inspected, HMRC will take away all of your records and then return with questions. Usually they take one year’s accounts, but if they uncover any deception then they can go back by five years or more. In this case, they can raise penalties of up to 100% of any tax that is outstanding. But if an honest mistake has been made, there is the opportunity for a reduction.
That said many investigations find nothing amiss meaning there’s nothing to pay, so there is just the inconvenience to take into account.
Here are the three most important things that you can do to increase your chances of avoiding a HMRC tax investigation:
1) Ensure that your tax returns are submitted on time.
2) Make sure all of the information submitted is as accurate and comprehensive as possible.
3) Use the extra space to explain any fluctuations, as big variations in turnover or profit can arouse suspicion.