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An HMRC tax investigation can be a stressful time for anyone. Still, there is a transparent process and legislation underlying the tax investigation procedure that will help you to understand why the investigation is happening, what you can expect to happen during it, and what the outcome may look like. If you have received notice of a tax investigation from HMRC or you want advice about how best to prepare your tax affairs to prevent an investigation or to make one go as smoothly as possible, you can contact us. At Auditox Accountancy we can give you professional advice about all aspects of HMRC tax investigations.
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There are several reasons why an HMRC tax investigation may occur. Some of these are out of your control but others can relate to how you have completed your tax returns.
Check out: Tax Investigation Cover
HMRC will complete random checks. Every year, some businesses will be chosen at random to be investigated.
Some types of businesses are deemed to be in a "high-risk industry". This means that the businesses in this industry are more likely than others to have tax issues. For example, businesses that deal mainly with cash payments rather than cards.
HMRC has a Central Risk team. This team uses data mining tools to identify unusual activity in people's accounts. The type of activity they might pick up on will include:
Occasionally, a tax investigation can be triggered by a tip-off. This is when an individual informs HMRC that they believe a person or company is committing tax fraud.
There are three main types of HMRC tax investigations. The type of investigation you are under will determine what you can expect to happen.
This is also known as a "drains up" tax inspection. This is the most thorough type of investigation and occurs when HMRC has reason to believe that there is a significant risk of error in your accounts.
During a full enquiry, you can expect HMRC to investigate the entirety of your business records. This can include:
If you have a limited company, you can expect HMRC to also investigate the tax affairs of all company directors as well as the business taxes.
Find out more: Closing A Limited Company With Debts To HMRC
An aspect enquiry is less thorough than full enquiries. It is triggered when HMRC believes that there is an error with one part of your tax return. HMRC will investigate this one particular aspect of your accounts where there appear to be inconsistencies.
This is the type of enquiry that is part of HMRC's regular random tax investigations. The depth of the investigation will be at the discretion of the officer, depending on what they find.
It is a common misconception that HMRC only investigates Income Tax. In fact, they also investigate:
Discover: How Likely Are You To Be Investigated By HMRC
The outcome will depend on the information that HMRC has discovered during their investigation of your accounts. At the end of the investigation, you will receive a decision notice and/or a contract settlement.
HMRC may discover that you have overpaid on your taxes. In this situation, you can expect them to issue a refund to you for the discrepancy.
HMRC may also discover that you have not paid enough tax. In this situation, you can expect them to issue you a bill for the remaining tax that you need to pay.
HMRC may determine that you have engaged in deliberate wrongdoing about your tax return. This can be a criminal investigation regarding tax fraud or tax evasion and is the most severe outcome.
Every tax investigation is different depending on the type of tax audit and your circumstances. Generally speaking, however, the investigation will have five stages.
In the first stage, you will receive a letter from HMRC informing you that they will be conducting a tax audit. They will also lay out the information that they need from you. This could be expense receipts,
It is worth at this point checking that HMRC is within the time limit allowed to trigger the investigation in the first place. Tax inspections are under very strict rules about the time limits in which they can begin.
A tax inspector will have 12 months from when the return was filed. An HMRC investigation can only be opened after 12 months if the HMRC officers couldn't reasonably have known about the loss of tax at the time. For instance, if it had been deliberately concealed.
If you do not respond to the opening letter, you will receive more correspondence consisting of a formal request for the information and sometimes a penalty.
If you did respond to the opening letter, you may still receive further correspondence with clarifying questions and potentially a request for more information.
A face-to-face meeting can be requested either by you or by HMRC. Attending a meeting will demonstrate cooperation and can make the investigation more streamlined. You are welcome to bring along another person for moral support or to give you advice/take notes for you.
Before a face-to-face meeting, you can:
A face-to-face meeting can be daunting but you do have some control over the situation. The meeting is an information-gathering effort so being upfront and honest if you have made a genuine mistake will usually go down well.
During a meeting, you can:
After a meeting, you can:
As we have mentioned, there are three possible outcomes to the investigation:
If you are asked to sign a contract settlement, you will often be given a schedule of adjustments. This is the schedule on which HMRC proposes you make any necessary payments. Interest can be charged on penalties so it is worth looking into whether you can pay them off as a lump sum.
For routine tax audits that uncover nothing unusual, HMRC can't go back further than 12 months. However, HMRC can initiate a discovery assessment if:
The time limit on a discovery assessment is longer and the investigating officers can look into historical tax records.
For basic innocent clerical errors, they can look back four years. If they suspect that careless mistakes have been made then this time limit is extended to six years (except for VAT where the limit remains at four years). For suspected fraud, negligence, or dishonesty the limit is extended to 20 years in all cases.
Explore: How Far Back Can HMRC Go
You can't always avoid an investigation because in some cases they truly are random. If you feel that you are having too frequent tax audits or that the investigation is being triggered under false information, you can appeal it at the very start.
Otherwise, your best chances of avoiding an investigation are to be very precise and correct with your tax returns and records. Don't pay tax late, ensure that your accounts are up to date and that they match the amount of tax that you pay.
If you have a complicated tax situation, such as offshore bank accounts, a good accountant will be able to keep these records transparent and easy to understand for HMRC.
Contact Auditox Accountancy. We are a team of professional accountants with many years of experience with all aspects of tax. We have a thorough understanding of HMRC tax investigations and will advise you on exactly what needs to be done each step of the way.
We can also help you to complete your tax returns to ensure that you pay the correct amount. And we can also help you look through your accounts in preparation for an investigation if needed.