HMRC Tax Investigations Advice
Tax audits and inspections can be complicated and stressful, so seek professional advice as soon as a tax investigation begins unless you are certain of your position.
Investigations frequently result in unexpectedly large tax bills, insolvency, and the need for a time-to-pay arrangement, a company voluntary arrangement, or even a creditors’ voluntary liquidation.
HMRC Tax Investigations: The Basic Facts
While random HMRC Tax investigations used to be a rare occurrence, the tax authorities now have a wide range of sophisticated and effective tools at their disposal, making consultants who engage in risky behavior the most likely targets.
HMRC investigations are aimed at determining whether accurate information has been provided, as well as whether accurate tax amounts have been paid.
Who is Likely to Face an HMRC Tax Investigation?
Tax inspections are most common in businesses that are registered for VAT or PAYE, two areas where mistakes are common.
Routine tax audits focusing on income tax or corporation tax are much less likely, unless HMRC has reason to believe you are concealing income or filing returns incorrectly. Be aware that deliberate concealment or even fraudulent activity can result in criminal investigations. And ignorance is rarely a sufficient defense.
If any of the following apply to you are far more likely to be the subject of a tax investigation:
- You make mistakes on your tax returns that need to be corrected
- You file returns or pay tax late
- Your expenses are unusually high for your industry
- Your tax returns are inconsistent with your standard of living
- You have property income
- You work in a high-risk industry
Types of Tax Investigations
Aspect, full, and random investigations are the three types of tax investigations.
Aspect enquiries will focus on one or more areas of your tax information; full enquiries will involve an inspection of your entire tax return; and random enquiries are a tool to evaluate tax returns in areas that are deemed to be high risk. All of them can be very serious.
The HMRC Tax Investigation Process Explained
HMRC will write or call you to let you know about the investigation and what they want to look into. A tax investigation will begin with a letter requesting information (referred to as an “information notice”). During a tax audit, the inspector will usually want to meet with you and look over your tax records. If you are the subject of a tax investigation, the letter will specify which parts of your tax return HMRC wants to examine.
This might be:
- Your self-assessment tax return
- Your business tax return
- PAYE records and returns
- Your financial statements and tax calculations
If you employ an accountant, HMRC will almost always contact them if they have the authority to do so. If you do not respond to a request for information or refuse a visit, you may be subject to a penalty.
Employing an experienced tax specialist to act – and speak – on your behalf is a sound idea for many reasons, but especially in the case of tax investigation.
Dealing with a Tax Investigation: What to Expect
HMRC aims to provide the necessary assistance to small businesses that are genuinely attempting to file tax returns and make timely payments. If you made an honest mistake, you shouldn’t be concerned because HMRC has a number of initiatives to assist business customers, including Time to Pay.
If you don’t already have one, you should think about hiring a specialist tax accountant. Just as you wouldn’t try to fix your own boiler, this is one instance where professional assistance is invaluable. An accountant will assist you in meeting your obligations on time and with the least amount of stress possible.
Once a tax investigation begins, it can take months or even years to complete.
It can also be expanded to cover a wider range of areas. For example, what may have begun as a corporation tax investigation may turn into inquiries into the director’s personal tax affairs. In this case, an expert’s help can be invaluable, as they can take on a lot of the burden and advise you on the best course of action if HMRC is being unreasonable or requesting too much information.
What Costs are Involved in an HMRC Tax Investigation?
HMRC investigations are, without a doubt, inconvenient, intrusive, and costly.
One of the most significant costs you’ll face as a business owner/director is the time you’ll have to spend dealing with HMRC rather than focusing on growing your company. You will, however, incur a number of additional costs.
While HMRC will cover the costs of the investigation, an investigation will typically require the preparation of books and records prior to the inspector visiting your premises, which is another area where costs can be incurred.
If HMRC finds you to be at fault after the investigation is completed, you may be subject to financial penalties. This will include the unpaid tax liability, any interest due from the original payment due date, and a penalty of up to 200 percent of the original liability. Tax investigations take an average of 16 months to complete for larger businesses.
While the costs of an HMRC investigation are unlikely to have a significant impact on a large corporation’s balance sheet, a lengthy tax investigation could spell big trouble for a smaller company. This is especially true if there are substantial interest and financial penalties to be paid.
How Much Power Do HMRC Tax Investigators Have?
The majority of SMEs only deal with HMRC to file returns and pay taxes, but tax investigations can happen at any time. That is to say, you do not have to do anything wrong to be approached by an HMRC investigation officer.
If you’re under investigation by HMRC, it’s important to understand what the investigators can and can’t do.
They have to tell you what taxes they're looking into.
If HMRC decides to investigate you, it must specify which aspect of your taxes it is looking into. “We will only review the records relating to the tax, duty, or tax credit we have told you we will be looking at,” HMRC states. If we plan to review multiple taxes at the same time, we’ll let you know ahead of time and give you the option to decline.”
HMRC has broad authority to collect information from taxpayers and third parties. You have the right to refuse if an investigator is reviewing your VAT return but also requests to see your corporation tax records without giving you prior notice.
HMRC investigators have the authority to inspect a company's premises.
Although most visits are pre-announced, the number of unannounced visits by tax inspectors and investigating officers from HMRC has increased in recent years.
Officers in charge of investigations can:
- Inquire about the company’s books and records, as well as the owners and employees.
- Computers can be searched, and records can be removed for examination.
- HMRC has the authority to inspect third party premises, but it will only do so if the premises are used for business purposes and stock or other assets are stored there.
- An inspection notice can be appealed, but there is no right of appeal if the notice has been approved by the Tax Tribunal. Obstruction can also result in penalties from HMRC.
If HMRC suspects you of committing or intending to commit fraud, an investigation can be launched under the Code of Practice 9 fraud investigation procedure.
HMRC has changed the way it investigates and settles tax fraud cases in recent years by introducing the Contractual Disclosure Facility (CDF). This encourages the person under investigation to fully disclose any intentional or unintentional attempts to defraud the tax system.
Is There a Right to Appeal?
You have the right to appeal to HMRC at any time if you believe your tax affairs are being investigated unnecessarily or unfairly.
HMRC follows a well-defined process for reviewing and escalating appeals. A tax expert is required to best understand how to proceed, as any mistakes could jeopardize your chances of success.
How Pearl Lemon Accountants Can Help
We can help you if you’re having trouble making HMRC payments or need assistance dealing with HMRC threats regarding VAT, PAYE, self-assessment, or corporation tax issues. Better still, we can help ensure you are never put into the position to be on the receiving end of an HMRC tax investigation at all.