HMRC investigations – what you need to know
Posted on 31st October 2020
Her Majesty's Revenue & Customs (HMRC) carry out tax investigations to:
• take a closer look at your business finances
• make sure you have paid the right amount of tax, now and in the past.
If you are notified that HMRC is planning an investigation you are legally required to cooperate, but it doesn’t mean that the inspectors think you have done anything wrong.
If you have good accounting procedures a tax investigation shouldn’t cause you too many problems. Your bookkeeper or accountant will be able to guide you through the process.
Starting an investigation
You will receive a letter to let you know that HMRC is planning an investigation. The letter will tell you whether the inspectors are looking at something specific or are reviewing your tax affairs more generally.
If they are planning a full investigation then you will probably need to provide:
bank and credit card statements
sales invoices or records
chequebooks and paying-in slips, if you still use them
job quotes or pricing estimates
purchase invoices and expense receipts.
If your records are stored digitally, the inspectors can ask for access to the software you use as well as copies of your records.
What HMRC inspectors look for
Inconsistencies – HMRC can calculate your expected earnings quite accurately, so if your tax return differs significantly from their calculations the inspectors might want to have a closer look at your business.
Industry sectors – HMRC sometimes targets certain sectors or business owners that have multiple sources of income.
Businesses that have more risk – some industries deal with a lot of cash transactions, such as beauty salons or barbers, taxi drivers and fast-food restaurants. In these cases, mistakes are easy to make and a few people might try to conceal their real income or be involved in money laundering.
Unexplained behaviour – suspicion of fraud or criminal behaviour will trigger an inspection. However, you might be doing something quite innocently that looks suspicious, and which simply needs to be properly explained. For example, your expenses might be high compared to your income, or your tax returns might be late.
The inspection process
Make sure you have your records in order, ideally for as long as you have been in business. The more information you have, the better.
To make the process as simple as possible you will need to prioritise an inspection and devote time to collecting all the relevant information at the start. This could include:
VAT – check that you are claiming and paying your VAT correctly. If you are suspected of VAT fraud the consequences can be very serious.
Audits – most small and medium-sized businesses will be audited about once every six years. This will include auditable accounts, receipts, expenses, and claims.
Payment process – the inspectors will want to know how you manage your payment process and that it is secure.
Approval process – most businesses have a financial approval process in place, so you will need to provide evidence of how your spending is reviewed to make sure that it is reliable.
How far back can in investigation go?
Your accounts and tax submissions for four years before the date of the investigation could be reviewed. If discrepancies are found you will have to pay any unpaid tax.
However, if you have regularly made mistakes on your tax returns the inspectors might look back over the last six years. If you are suspected of deliberate tax avoidance the investigation could go back over the last 20 years, so it’s important to keep records and accounts for as many years as you can.
The best way to minimise the impact of an HMRC investigation is to have good financial processes and records in place.
We’ll be happy to give you some advice, so please get in touch.
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