A notice for tax investigation by HMRC can be stressful for most business owners. But you don’t need to dread a tax investigation if you are keeping an efficient account. Tax investigations are mostly done randomly by HMRC to ensure the businesses are complying with HMRC legalities in filing their tax. Most probably getting a tax investigation notice doesn’t mean that you have done anything wrong.
When HMRC does a tax investigation?
You are most likely to be called for a tax investigation for one of the following reasons:
- HMRC received a tip of your wrongdoing.
- You are filing returns late constantly.
- There are inconsistencies in your financial statements.
- Your business is in a high-risk area i.e., businesses in your area have high cash flow.
- Your business is randomly targeted to ensure HMRC compliance.
- There is a gap between your way of living and your finances filed in tax returns.
- You are not making a profit for multiple years as shown in your tax returns.
- HMRC finds about your dealings with another firm under investigation or in their tax return that you failed to mention in your tax returns.
Types of tax investigations
Random check
HMRC targets specific business areas for random checks. These checks are usually to ensure the business is accurately filing its tax returns. If you are selected for a random check, it doesn’t mean you have done anything wrong.
Aspect inquiry
In aspect inquiry, HMRC looks for certain aspects of your accounts. You may face aspect inquiries due to inconsistency in a particular aspect of your tax return.
Full inquiry
A business is usually called for full inquiry if HMRC is suspicious about your accounts or has received a tip of your wrongdoing. In full inquiry, a detailed investigation is done at every aspect of your accounts.
What taxes come in tax investigation?
The taxes investigated by HMRC usually depend on the type of inquiry. A tax inquiry is not limited to your income tax, HMRC may look closely at a variety of accounts such as VAT, Capital Gain Tax, Corporation Tax, CIS, IR35, and other taxes HMRC is suspicious about.
If you have complicated tax affairs, it’s best to hire a tax expert to ensure your accounts are efficient.
How far back a tax investigation can go?
How far back HMRC goes into your accounts depends on the type of investigation you are facing and whether they found anything suspicious or wrongdoings in your accounts in an initial investigation. In a normal investigation, HMRC can investigate your previous four-year records. If they find any obvious mistakes in your accounts, they can go back 6 years into your accounts. But if they find you have deliberately tried to avoid paying tax, the investigation can go as far as 20 years back into your accounts.
What happens after the investigation?
If HMRC finds any mistakes that are obvious to be an error or negligence, you will be told to straighten your accounts and pay what you owe to HMRC. For any corrections, HMRC will give you 30 days but if you fail to do so HMRC will correct the return itself.
If HMRC has any reason to believe that you fraudulently filed your tax return to lower your tax, you will be liable to pay extra tax and interest on the tax you didn’t pay. You can also face imprisonment if there are any serious frauds found in your tax statements. It is best to get legal help if any such thing happens to you.
Preparing for the tax investigation
If you are contacted by HMRC for tax investigation, it is best to revisit your accounts before HMRC visits. Here are some things you need to do for a stress-free investigation:
- Revise your accounts and look for any shortcomings.
- Make sure your records are in order while gathering all the relevant information like payment receipts.
- Make sure your account balance matches the balance shown on accounting software.
It is best to hire a tax or accountancy expert before and during HMRC investigation. This will help in straightening your account before an investigation and efficient compliance of HMRC demands during an investigation.
