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An HMRC tax investigation has wide-reaching powers but that doesn't mean that they can go back as far as they want whenever they want. There are strict rules and regulations governing the investigation process that determine the length of time that HMRC can go back when looking into your tax affairs. If you need advice about an HMRC tax investigation or you want to ensure that your records are correct to avoid getting investigated, contact us at Auditox Accountancy for professional help and advice.
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HMRC has the right to check the tax affairs of any person or company at any point. If you are an employee, then your employer is responsible for paying your tax through the PAYE system but if you are self-employed or have any other income outside of employment then you will need to submit a Self-Assessment tax return and this income tax can be investigated. As can all other types of tax, including:
An investigation can be triggered because HMRC's data mining team has found suspected errors in your accounts, if you work in a "high risk" industry, if there has been a tip-off about your or your company, or as part of a random check.
You will be asked to submit information related to your tax accounts. This could include:
The information that HMRC will ask for will depend on the type of tax enquiry being conducted. For example, a full tax investigation will often require more information than an aspect enquiry.
There are three types of HMRC tax investigation:
Dig Deeper: 5 Stages Of Tax Investigation
During a full enquiry, HMRC can look into all aspects of your tax affairs, including the amount of tax you paid, all of your accounts, your Self Assessment tax return as well as your company, PAYE, and VAT tax returns where applicable.
A full enquiry is conducted when HMRC suspects that there is a significant risk of error in your accounting.
If HMRC suspects that there is only a risk of error in one aspect of your accounting, they will launch an aspect enquiry. This has less scope than a full enquiry and will look at only one particular aspect of your tax affairs.
Sometimes HMRC will choose a person or company at random for a tax investigation. In this case, the depth of the investigation will depend on what HMRC uncovers.
HMRC has 12 months from the date of your tax submission to launch an investigation. If this initial investigation unearths puzzling results, then they have the power to reopen previously settled tax returns.
HMRC's power to investigate your account comes from their information gathering powers laid out in Schedule 36, Finance Act 2008. The act does not specify time limits on how far back HMRC can go but a variety of court cases and tribunals have set out clear precedents that HMRC needs to abide by.
The officers will initially look at the 12 months that the investigated tax return covers. Based on their findings from this, they may be able to launch a discovery assessment. They can only do so if the officers have reason to believe that a loss of tax has been brought about carelessly or deliberately and that there would be no reasonable way for HMRC to have known about it previously.
HMRC cannot trigger a discovery assessment if the return was filed by practice prevailing. This means that they can't retrospectively investigate you if the return was filed correctly based on the rules at the time, even if it is incorrect based on current legislation.
They also can't go on a "fishing expedition" to look for errors in the previous tax year and beyond if they are unable to show evidence for why there are suspected problems.
This discovery assessment can go back for different periods depending on what HMRC has reason to suspect has happened.
Learn more: How Likely Are You To Be Investigated By HMRC
The length of time the investigation will take depends on the type of investigation, how big the company is, and how complicated the tax records are.
Generally speaking, an aspect enquiry won't usually last for more than six months whereas a full enquiry can last as long as a year and a half.
Once the investigation is complete, there are three possible outcomes:
It isn't always possible to completely avoid a tax investigation because sometimes it truly is a completely random check. You can reduce your chances of being investigated, however, by ensuring that you pay tax on time, that your tax returns are submitted correctly, and that you pay the correct amount of tax.
Explore further: How To Avoid Tax On Capital Gains
If you have received notice that HMRC will be investigating your taxes or you want to ensure that your tax return and records are fully up to date and correct to avoid being investigated, Auditox Accountancy can help you.
Our team of experienced accounting professionals understands UK tax law inside and out and can advise you on all areas of tax, even if your tax situation is complicated.
Uncover more: Closing A Limited Company With Debts To HMRC
An HMRC tax investigation can be a stressful time but some strict rules and regulations govern how far back HMRC can investigate your taxes. The investigation must be triggered within 12 months of your tax return being filed and they can look back at previous tax returns for four years in the case of innocent errors, six years for careless mistakes (except for VAT which remains at four years), and 20 years for deliberate tax evasion and avoidance.