It’s inevitable that some businesses will face a routine tax audit conducted by HMRC. Along with it being a time consuming and complex process for companies and sole traders, it can sometimes even lead to a higher tax bill.
Nobody wants to be the subject of an HMRC investigation, so whether you have already been targeted by the tax authority, or just want to know what to expect, here are some key points to be aware of.
What is an HMRC tax investigation?
The tax authority has the power to check your affairs at any time to make sure you are paying the correct amount of tax. This is a lengthy process as they will spend hours going through records just to find that one mistake.
Not all tax investigations are the same. HMRC processes two main types of enquiries.
Aspect enquiry
This enquiry is conducted when HMRC are concerned about one or more specific elements of your tax return and finances, which could be a common mistake rather than tax evasion. This can be due to an accounting error, not ticking the correct boxes or giving the wrong treatment to expenses if you fill your tax returns out by yourself. HMRC can correct returns from there end or in some instances may require you’re your consent.
Full enquiry
A full enquiry is conducted when HMRC believe there is a high risk of errors, deliberate or otherwise, throughout your financial statements. If you are a target for a full enquiry, HMRC will go through all of your business records, and potentially even personal records of all company directors. They do not always take a direct approach as they may firstly open personal investigations as that is where the naughty stuff really happens. This then progresses into a company investigation.
Some things HMRC might look at include:
- The amount of tax you pay
- Your company tax returns
- Your tax calculations and accounts
- VAT returns and records
- PAYE returns and records.
How will I know if I am being investigated?
You don’t need to have done something wrong to be investigated – it can happen to anyone who has submitted a tax return.
Although some tax investigations are random, unusual activity, undisclosed accounts and uncharacteristic spending could also prompt an enquiry. The classic examples are when someone earning a relatively average income is somehow able to afford a Lamborghini. Someone earning £10,000 per year buys a £500k home or it can be as small as earning £15,000 per year but £17,000 has been credited into your bank account.
If your company or yourself has been selected for investigation, you’ll receive a letter or phone call from HMRC.
Can HMRC look at your bank account?
HMRC has the power to check personal information about a taxpayer that they are investigating by issuing notices to all third parties, which includes banks and other institutions.
But HMRC needs to justify that the information is reasonably required for the enquiry and it cannot issue a third-party notice without the permission of the taxpayer, or approval from a tax tribunal.
Can HMRC find out your income?
Earlier this year, HMRC announced the introduction of its new ‘financial institution notice’ to have quicker access to taxpayer’s information and documents from banks and other financial institutions.
In this case, HMRC will not need approval from the taxpayer or from a tax tribunal to issue the notice.
In other words, yes, HMRC can demand to see a taxpayer’s private bank statements if they believe, or have been tipped off to the fact, that the income you have declared might not match up with your private outgoing transactions.
What do I do if HMRC turn up at my place of business?
I think it is safe to say that HMRC during the COVID period will not be turning up on the spot to anybody’s business premises.
But when and if the tax man does happen to turn up in person, you do not have to accomodate them unless they have a court warrant. Without a warrant, it is better to politely decline entry and ask them to make an appointment in writing. After all, we all have businesses to run and cannot just afford to close for on the spot appointments.
This will not make them forget about you but will allow you to have some time to prepare for the appointment with your accountant if you have one. In most cases if you have an accountant you do not even need to be present during the investigation as we are allowed to represent you entirely.
Speak to us about handling a tax investigation and if you’re a client, let’s have a chat about our tax investigation insurance.