There are a few reasons HMRC may choose to investigate you;
They receive a tip off that you may be intentionally avoiding paying tax
Your returns show you haven't been making a profit for a few years
Your returns regularly include mistakes
There are large fluctuations in your reported figures for example income or business expenses
You report that company directors are earning less than employees
Your figures look dramatically different to the normal position for a business in your industry
They suspect that you are not including all your income
You don't have an accountant; It's highly suggested that the HMRC are less likely to investigate you if you've got an accountant that prepare your returns.
What can the HMRC check?
There's a range of records and documents that the HMRC can check. They will always contact either you or your accountant much in advance to tell you what pieces of evidence that they want to see, this will generally include:
Information on the taxes you have paid
Your books, and details of the tax calculations you have made
Annual returns (If the investigation is into a limited company)
Your self assessment (If the investigation is into a sole trader) HMRC may want to see the self assessments of company directors if its investigation a limited company
PAYE records when applicable
Different types of HMRC investigation.
Not all HMRC investigations are the same and the type of investigation will depend on the concerns or suspicions that they may have. Full enquiry- These may take place when the HMRC believes there's a high risk of error on your returns, If you are subject to a full enquiry the tax authority will look through all of your business records and possibly the personal records of any and all company directors.
Aspect enquiry- An aspect enquiry happens when the HMRC is concerned about one or more specific elements of your finances. This enquiry is much more common in the case of genuine error as apposed to purposeful tax evasion.
How far back can they investigate?
In most cases the HMRC will go back through 4 years of tax returns from whomever they are investigating, If you are making many obvious mistakes they have the power to go back through 6 years worth of tax returns.
If it appears you are deliberately avoiding paying tax then they can go back through 20 years worth of tax returns for any individual they are investigating.
What happens during a HMRC visit?
HMRC have to stick to strict procedures when visiting you for investigation, you may be asked to meet at your business premises, your accountants offices or at their offices. They must inform you in advance of what they want to ask you when you arrive, and they have to stick to those questions and nothing more. They don't have the power to legally force you to attend your meeting with them, however it is seen as a sign of cooperation if you do attend and could possibly benefit your case when it comes to the review stage of investigation.
After the investigation.
After the HMRC have been through every stage of their investigation they will write to you explaining in detail the findings of their investigation. If they find only genuine errors in your tax returns they will explain how you can go about fixing the errors, if you choose to ignore this advice they will correct it themselves after 30 days.
If their investigation finds that you have unlawfully avoided paying tax or are acting negligently you'll be made to pay penalties, extra tax and interest on top of it all. You will be required to sign a contract pledging that you will willingly pay the extra tax and penalties, if it gets to this stage it is always best to find yourself legal advice and representation before signing anything.
Should I take out tax investigation insurance?
HMRC investigations are stressful, expensive and time consuming. Because of how long the process can take you may lose out on time that would be spent making business and working with your clients. All of this can lead to loss of earnings on top of the penalties you will face paying.
To leave you with peace of mind you can always take out tax investigation insurance that will help cover your loss of earnings in this stressful time.
Strive work with insurance brokers that can help you figure out what best coverage you need to protect you if this happens to you in the future. If you are in any way concerned about your bookkeeping or accounting practices we can help you to review everything, and put processes in place to ensure you are complaint in these important aspects of your business. - we are members of the IAB and our staff are AAT qualified. Drop us an email to firstname.lastname@example.org or give us a call on: 0333 335 5137