Facing an HMRC tax investigation can be a daunting prospect, as the mere mention of a “tax investigation” often instills a sense of dread.
However, it’s important to remember that if you have been maintaining accurate and efficient accounts for your business, the process shouldn’t be overly burdensome.
While it may not be a leisurely walk in the park, this guide aims to provide you with valuable insights and strategies to transform what might seem like a frightening experience into one that is primarily time-consuming.
By following the advice and suggestions outlined here, you can navigate the tax investigation with greater confidence and minimize the impact it has on your business operations
What is a tax investigation?
In the UK, a tax investigation refers to an official examination conducted by HM Revenue and Customs (HMRC) to assess an individual’s or business’s tax affairs. The purpose of the investigation is to ensure compliance with UK tax laws and regulations, detect any potential tax evasion, and address suspicions of fraudulent activities or inaccurate reporting. HMRC initiates investigations based on various factors, such as risk assessments, information received from third parties, or random selection.
During the investigation, HMRC will scrutinize financial records, transactions, and tax returns to verify their accuracy and assess whether all tax obligations have been met.
The process can range from a simple review of records to a more in-depth examination involving interviews, requests for additional information, and even visits to business premises.
It is essential to cooperate fully with HMRC during the investigation, as the outcome can lead to penalties, fines, or legal actions if non-compliance or irregularities are discovered.
How do I know if HMRC is investigating me?
Detecting if HMRC is investigating you can sometimes be challenging, as they typically do not openly disclose ongoing investigations. However, there are certain indicators that might suggest you are under scrutiny. You may receive a formal letter from HMRC notifying you of a tax investigation, outlining the reasons behind it.
Another sign could be increased communication or contact from HMRC, such as requests for additional information, interviews, or visits to your business premises. Unusual delays in receiving tax refunds or increased scrutiny of your tax returns might also raise suspicions.
It’s important to note that these indicators do not definitively confirm an investigation, but they could prompt you to seek professional advice from a tax accountant or legal expert to better understand your situation.
At its core, HMRC seeks to bring clarity to a specific element within your tax return. However, should they elect to embark upon a comprehensive investigation, your financial records shall be called upon for submission
These will probably include:
- Bank and credit card statements
- Sales invoices or records
- VAT records
- Chequebooks and paying slips
- Job quotes or pricing estimates
- Payroll records
- Purchase invoices and expense receipts
In the digital realm, should your records be stored electronically, HMRC holds the authority to requisition access to your software system and obtain a copy of your records.
The duration of the tax investigation process predominantly hinges on the volume of information HMRC intends to examine.
Smaller-scale tax investigations generally conclude within a span of three to six months, while comprehensive investigations can occasionally extend up to 16 months before reaching completion.
Reasons you are facing a tax investigation
HMRC may have various motives for delving deeper into your financial affairs, and it is important not to leap to the assumption of wrongdoing.
Tax matters are frequently intricate, and HMRC’s objective is not to penalize companies that inadvertently make mistakes.
Here are some prevalent reasons that may prompt a tax investigation:
Omissions and oversights
It’s possible that a mere oversight led to a missed checkbox, an overpayment or underpayment, a section left unattended, or the exclusion of vital supplementary information from your most recent tax return.
HMRC initiates investigations to uncover the root cause of such inconsistencies. If you possess the necessary documentation, you can swiftly resolve the issue and resume the smooth operation of your business.
Within HMRC’s focus area
HMRC may adopt a proactive stance by closely examining specific sectors where potential tax shortfalls might arise. Alternatively, certain checkboxes that pique their interest, such as multiple income sources, can draw their attention.
Deemed a risk
The HMRC risk-based selection process may be triggered by various factors, including cash transactions or significant capital movements between the owner’s personal and business bank accounts.
HMRC harbors suspicion
While HMRC certainly investigates cases involving fraud or criminal wrongdoing, innocent behaviors can also appear suspicious until properly explained. For instance, high expenses relative to income or consistently delayed tax return submissions may attract HMRC’s scrutiny. The level of HMRC’s suspicion may also influence the extent to which they delve into your account history (see below)
The HMRC tax investigation time limit
HMRC tax investigation time limit determines the period within which HMRC can examine your accounts and tax submissions. Typically, HMRC investigates up to four years prior to the date of the investigation and may claim any unpaid taxes believed to be owed within this timeframe.
However, if HMRC finds evidence of carelessness, such as regular mistakes in tax returns, they can extend the investigation period to six years.
Furthermore, in cases of suspected deliberate tax avoidance, HMRC has the authority to investigate up to 20 years of accounts, if available.
It is advisable to retain access to multiple years of financial records to ensure compliance with HMRC’s requirements
HMRC Tax Investigation Procedure
There are three distinct approaches employed by HMRC to investigate tax evasion:
- Full enquiry: A full enquiry tax investigation involves a comprehensive review of your business records. HMRC initiates this type of investigation when they suspect a significant risk of tax errors. In the case of limited companies, the investigation can extend to the tax affairs of company directors and the business itself.
- Aspect enquiry: HMRC conducts an aspect enquiry when they focus on a specific area of your accounts, such as identifying inconsistencies in a particular section of a recent tax return.
- Random check: HMRC retains the authority to carry out random checks at any given time, irrespective of the state of your accounts or whether any alerts have been triggered.
During the HMRC tax investigation process, an HMRC team will conduct an audit of your accounts and pose various inquiries. They may also request to visit your home, business address, or your accountant’s office.
If HMRC suspects criminal activity, such as serious tax evasion or VAT fraud, they may initiate a criminal investigation. However, you would only become aware of this when you are arrested or receive an HMRC investigation notice, inviting you to attend a voluntary interview under caution.
However, in some cases, even when serious and deliberate tax evasion is uncovered, HMRC may choose to handle it on a civil basis through a Contractual Disclosure Facility (CDF) under Code of Practice 9, also known as a COP9 investigation.
This structured and specialized process allows HMRC to recover outstanding tax, along with interest and penalties, provided full disclosure is made. In return, HMRC guarantees that the individual will not be prosecuted for the disclosed issues.
What are the potential outcomes of a tax investigation?
The outcome of a tax investigation is influenced by various factors, with the key determinant being whether you are deemed at fault. Criminal convictions are uncommon, typically limited to cases of proven fraud.
In most instances, you will likely face fines for a misdemeanor or be required to settle the outstanding tax amount. If you are notified of being in the wrong and needing to make payment, it is advisable to promptly comply.
Should you disagree with the decision, you have a 30-day window to lodge an appeal. When significant discrepancies or errors are found in your records, HMRC assumes that similar errors may exist in your earlier statements.
This presumption of continuity has a bearing on the investigation’s outcome.
You are likely to face a penalty if you are found to have:
- Made a mistake (despite taking reasonable care)
- Failed to take reasonable care and this has led to a mistake
- Deliberate omissions that have not been concealed
- Deliberate omissions that you have tried to hide
Should you be deemed at fault, it is probable that HMRC will conduct subsequent checks to assess if you have rectified your actions. Therefore, if you wish to avoid ongoing correspondence from HMRC, it is advisable to promptly address and rectify any issues identified.
How to prepare for a tax investigation
Preparing for a tax investigation demands significant attention, necessitating the allocation of suitable time and resources. Approach the investigation as you would any other business project, understanding that it is a step-by-step process that requires careful navigation.
Take into account that you may not be able to dedicate as much time to your regular business activities. This might entail delegating responsibilities to others, reducing client load, or even seeking additional accounting assistance.
It is crucial to ensure that all your records are well-organized, not limited to the previous year. The more comprehensive your information, the better prepared you will be. Invest time upfront to gather all the relevant documentation, which will help avoid stressful searches later on.
If you are facing a tax investigation simply complete the online enquiry and one of our tax experts will return your call.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.