HM Revenue & Customs (HMRC) has in recent years increased its focus on limited companies, as the Government attempts to recover lost tax revenue and penalise or discourage companies from tax evasion.
Unfortunately, a business cannot eliminate the threat of a tax investigation and can be chosen at random for a routine check, but some may be targeted by HMRC for a number of different reasons. This can be a lengthy, expensive and often painful experience for the business and their accountant.
What Could Potentially Trigger a Tax Investigation?
Although HMRC can conduct random checks, there are various factors that could lead HMRC to begin a tax investigation, mainly if HMRC suspects that tax is being underpaid.
Tax investigations are more likely if;
- A tip off is received from a third party
- Regular mistakes are made on tax returns
- Persistent late filing
- Numbers fluctuate by large margins
- A significant change in figures from one year to the next
- An unexplained or significant difference in financial figures and ratios/margins from similar businesses in the same industry
- Directors earn less than employees
- Running a cash based business
Not everyone is a tax expert, so it is important to have the right information and representation through an accountant. Being proactive with your accountant and explaining any changes to HMRC as soon as they occur, can help alleviate any suspicions that may arise and potentially prevent any need for further inspection.
Two Types of Investigation
There are two different levels of investigation, an ‘Aspect’ or ‘Full’ investigation. As the name suggests, in an aspect investigation, HMRC will focus on a particular aspect of a company’s tax return. A full investigation will cover all of the company’s trading, and a review of its business books and records, and can be a more lengthy process.
What Happens During an Investigation?
HMRC will start the process by sending the company or accountant (if appointed agent) a notification of investigation. They may request a visit to the registered or trading address, or even ask for the Director to visit a HMRC office. They can follow this by a request for outstanding tax returns and up-to-date records and respond with specific questions in relation to these.
It is better to bring any anomalies or mistakes to the inspector’s attention at the start of the investigation, to show compliance and reduce future penalties. HMRC have wide ranging powers and access to significant amounts of data both in the public domain and from other Government departments.
An investigation will normally require the company to provide relevant accounts and records, but can cover up to 20 years depending on the length of time over which the errors have been made or the investigation extends. There may also be further visits to business premises or requests to meet at a HMRC office.
Summary
A HMRC investigation can be a daunting experience for any business and its directors and early advice and assistance should be sought. The main point of call will be the accountant, who in most cases will already act as the agent for the company.
Providing information when requested, and rectifying known mistakes early on, will help reduce any penalties that can be levied. HMRC will conduct random checks on businesses, but the chances of being investigated can be reduced if accounts are done on time, any mistakes are rectified quickly, and income is properly taken and accounted for.
See also our article on the risks of personal liability for HMRC debts attaching to a director via a Personal Liability Notice.
If your clients find they owe significant amounts after an investigation, then Bridgewood can provide advice on options to deal with the liability and dealing with HMRC.
Need advice?
Book your FREE consultation or request a call back.
