How to Prevent an HMRC Tax Investigation
Tax investigations may sound like something that only happens in exciting Scandinavian crime-thrillers, but the sad reality is that they are real pain for UK businesses.
On average, an HMRC investigation lasts just under 1.5 years and can cost thousands of pounds in accounting fees. And that’s just for your input during the investigation.
Obviously, this isn’t intended as a template for getting away with tax evasion. If you are being dodgy with your tax, then you can rest assured that sooner or later, HMRC will be on to you. However, there are plenty of instances when HMRC decide to investigate your business because of operational factors that could have been avoided by you.
In this blog, we want to name just a few of these tax ‘red flags’ that often lead to an enquiry or investigation.
No Small Matter
The first thing you can do to prevent an investigation is to understand the severity and the implications of an investigation in the first place.
It’s not a trifling matter. In fact, for most businesses, it’s a source of severe anxiety, as investigations are thorough and long.
If HMRC decides to look over your records, it isn’t just a few they look over. It’s comprehensive and detailed. If they find undeclared income, for example, this brings with it a lot of associated costs. Not only will you have to pay the tax on this income, but you’ll have to pay interest and penalties as well. This can turn a small, seemingly insignificant omission into a huge headache and tax bill.
Get an Accountant
HMRC has no vested interest in you having or not having an accountant. However, they are very aware that tax evasion schemes are much easier when there a third-party professional organisation isn’t overseeing your finances. Furthermore, it is much more likely that mistakes or inaccuracies arise in businesses that don’t use an accountant to process their tax returns.
Having an accountant isn’t a guarantee against suspicion, but it does – to an extent – legitimise your business in the eyes of HMRC. If you’re a small owner-operator, it’s very plausible that you may not utilise an accountant and only use a very simple bookkeeping service. But if you’re a large, VAT-registered Limited Company, there really is no reason (especially according to HMRC) for you NOT to have an accountant.
Tax Investigation Insurance
While this doesn’t actively prevent a tax investigation, it sure makes things a lot easier when things do go wrong. It isn’t particularly expensive and can help you pay for the accounting fees and and admin costs that go into an investigation.
‘Keep your friends close and your enemies closer’
Although HMRC is always a little reluctant to admit this, they do take tips about potential tax inconsistencies. This tends to be from ex partners, disgruntled employees, ex-spouses or even jealous neighbours. Make no mistake, HMRC does take these tips seriously, especially if there are grounds for an enquiry. And while plenty of these accusations are unfounded, it could still lead to an enquiry or an investigation, which is never ideal.
Consider Other Taxpayer Relationships
Be aware that HMRC while in an investigation HMRC will be checking your records – they can also apply to check the records of the suppliers you deal with. Both sets of inputs and outputs should therefore match, and HMRC can and will cross-reference different business documentation to expose inconsistencies. If they are investigating another business who you are partnered with, you might inadvertently end up being pulled into that investigation if their records aren’t correct or accurate.
Explain any inconsistencies or irregularities
Don’t presume that HMRC are going to understand everything on your tax return. You can pre-empt an enquiry by explaining everything clearly and clarifying the things that may elicit a frown or two from HMRC.
Here are a few things that HMRC might want to know more detail about:
- Low profits for a sustained period of time (i.e. how have you paid your mortgage)
- Where did new investment come from?
- Expenses that are unusually high
- A sharp rise or fall in sales and revenue figures
- An unexpected change in profit margin
- A lifestyle which does not coincide with your profits (i.e. living above your means)
- Your income doesn’t match up with industry standards
More than 250,000 enquiries are made every year. And while only a few of these turn into full-blown investigations, you definitely don’t want to be one of them.
Handing in Your Returns Late
A late return does come across as a little disorganised. If it happens once, that probably won’t have too many consequences. However, if it is a recurring phenomenon, then it will trigger a red flag and might lead to an enquiry and, further down the line, an investigation.
Dealing with a Business Tax Investigation
The most important thing you need when dealing with a tax investigation is a professional accounting service. Contact Defacto-FD if you have any further questions about tax investigations or if you require bespoke advice.
