Tax investigations from HMRC – What to expect?

As children, we are terrified of things that go bump in the night and the monster that may or may not be lurking beneath our beds, known as primal fear of the unknown. This fear does not go away as an adult, but it takes on a slightly different form. One such monster under the bed is the threat of tax investigation carried out by HMRC, which is especially concerning if you have never faced one before. It is undoubtedly a problematic situation for HMRC suspects of not paying the correct amount of tax or failing to submit the tax returns on time.

Tax investigation carried out by HMRC can be stressful for any business, but there are different ways that you can adopt to make this process as painless as possible. Here’s our guide for small businesses to better understand the concept of HMRC tax investigations.

• What is an HMRC tax investigation?
• What triggers a tax investigation?
• What types of tax investigations are carried out by HMRC?
• What business taxes does HMRC investigate?
• How far back can HMRC go during a tax investigation?
• When does a tax investigation end?
• Can I get the tax investigation cover?
• How to avoid an HMRC tax investigation?

What is an HMRC tax investigation?

A tax investigation occurs when Her Majestys Revenue & Customs (HMRC) decides to look into your companys finances in order to ensure that you are paying the correct amount of tax, both now and in the past. If your business is selected, you will receive an official investigation letter or phone call from HMRC,in which they will tell you what they intend to investigate. HMRC tax investigation may include your –

1. Amount of tax
2. Accounts and tax calculations
3. Self-assessment tax return
4. Company tax return
5. VAT returns and records (In case you’re VAT registered)
6. PAYE returns and records (In case you’re an employer)

A tax investigation should not be too onerous or time-consuming if you have strict accounting procedures in place along with a good accountant. Contact DNS Accountants for timely submission of returns and payment of taxes. We at DNS accountants ensure that you remain compliant and updated with all the tax regulations so that you don’t have to face any tax investigation from HMRC in the future.

What triggers a tax investigation?

HMRC claims compliance checks are generally initiated when figures mentioned on a submitted return appear to be incorrect in some way. For example - If a small business suddenly makes a large VAT claim or a large business declares a very small amount of tax, HMRC will most likely be alerted.

Your business could become a target of a tax investigation if any of the following things persist –

1. If you’re working in a high-risk industry and accepting cash payments regularly.
2. If you have a significant decrease in income, an increase in costs, or inconsistencies between different returns.
3. If you’re consistently filing your returns late.
4. If you’re charging a higher price than the industry norms.
5. If you’re doing business in a sector HMRC decides to target.
6. If your tax returns do not match with your standard of living.
7. If HMRC receives a tip

Take the help of a tax accountant to solve any of the tax issues and keep you refrain from HMRC tax investigations.

What types of tax investigations are carried out by HMRC?

There are three types of tax investigations carried out by HMRC –

1. Full enquiry - HMRC will examine all of your business records during a full enquiry/investigation, normally when they think there is a substantial risk of a tax mistake. They might look into the tax affairs of company directors and the businesss affairs while investigating limited companies.
2. Aspect enquiry - An ‘aspect investigation of your tax returns is usually a simpler procedure than a ‘full investigation. In this case, HMRC may choose to investigate a specific aspect of your tax returns and request additional information/details. This type of investigation frequently reveals a genuine error rather than a deliberate attempt made by the business to avoid paying the correct taxes.
3. Random check – Random checks can be performed at any time by HMRC – regardless of the state of your accounts or whether you’ve triggered an alert.

What business taxes does HMRC investigate?

Many people believe that tax investigations carried out by HMRC limited to income tax investigations only, but this is not true. HMRC may want to carry out tax investigations for a variety of taxes, including –

1. VAT
2. Capital gains tax
3. Corporation tax
4. IR35
5. Construction industry scheme (CIS)

If your business is right now facing tax issues or has complicated tax affairs that you cannot solve and searching for a professional tax accountant to remove all your tax-related hassles, contact DNS Accountants. It’s time that you should invest in a good software accounting package to ensure that your accounts always remain in order following the tax compliances.

How far back can HMRC go during a tax investigation?

In most cases, HMRC can look into a taxpayers returns for the previous four years to see if the taxpayer owes any money. However, if your returns are riddled with obvious errors, HMRC has the authority to go back six years in its investigation. And if it appears that you've been attempting to avoid paying taxes on purpose, it can look back through 20 years of your tax returns.

When does a tax investigation end?

The conclusion of an investigation is officially marked by the issuance of a decision notice or the agreement of a contract settlement.

1. Decision notices are typically received in the letter form outlining the final position, which may include a penalty notice or an assessment.
2. A contract settlement is a legally binding agreement between HMRC and the taxpayer in which the taxpayer agrees to pay the money, and HMRC agrees not to use its collection powers.

Note - A return that has been investigated cannot be investigated again

Can I get the tax investigation cover?

Tax audits are not only stressful, but they can be costly too. Aside from the possibility of an additional tax bill and penalties, investigations are even time-consuming. You could obtain tax investigation insurance to cover the cost of this lost time. DNS Accountants provides tax investigation cover, which protects your business against HMRC investigations. DNS will assist you with the investigation, and an expert will handle your case to provide you with complete peace of mind.

How to avoid an HMRC tax investigation?

1. Use the DNS online accounting portal.
2. Take out Tax Investigation Cover.
3. Ensure you make full and accurate disclosure of your affairs to your accountant.
4. Keep accurate and complete books and records to verify the figures stated on your tax return.
5. Minimise cash transactions: if you pay in cash, make sure you have a receipt.
6. Submit returns and pay your taxes on time.
7. Be responsible for your own tax affairs: sign your returns knowing that they are complete and accurate.

Remember HMRC has access to significant amount of information, including property transactions and bank accounts. Nothing is outside their jurisdiction; in fact, HMRC is the only agency allowed in law to enter your premises without a warrant. If you are worried in any way about your tax affairs, contact our account manager as soon as possible.

Remember, there is always a solution: DNS will ensure you remain compliant while legally holding back as much of your hard-earned cash as possible.

In case you have any query or want specialist advice on the "Tax investigation cover”, kindly call us on 03330886686, or you can also e-mail us at enquiry@dnsaccountants.co.uk

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.