HMRC recently announced that they will be able to enforce new powers when it comes to investigating companies they suspect of evading taxes.  Tax investigations can be worrying, even if you’ve done everything by the book.

Understanding the process can help you and your company deal with the situation and we can support you throughout with our tax investigation service.

Below is everything you need to know about how HMRC conducts tax investigations.


Why am I being investigated?

Just because your business is being investigated, it doesn’t mean you’ve done anything wrong. Some investigations are entirely random.

Sometimes you might get called up because the sector you operate in is facing a lot of scrutiny. This is currently the case with companies selling electronic sale suppression systems at the moment for example.

Alternatively, you may have filed your tax return late or it may contain accidental inconsistencies.

Knowing exactly why you’re being investigated by HMRC is a great way to understand the severity of the investigation and how you can prepare.

Once their investigation begins, HMRC can look into every aspect of your tax affairs. This could mean the tax you’ve paid, your self assessment and business tax returns, PAYE or VAT records and your business accounts.

Preparing such information is highly advised.


What are the types of tax investigations?

HMRC conducts three main types of inquiry. First, there are random checks. As the name suggests, these inquiries can open into the affairs of any business at any time. As long as you’ve kept your accounts up to date and comprehensive, there’s no need for you to worry.

Second, there are aspect inquiries. These inquiries look into one part of your accounts in which HMRC suspect an error may have been made. This could very easily be down to a mistake at the accounting stage, rather than a deliberate attempt to break the rules. A common error is forgetting to include savings income on your tax return.

Lastly, there are full inquiries. This happens if HMRC thinks there’s a strong chance your company has made a large scale accountancy error or a series of errors. In this case, they could take a look at all accounts, both business and personal, to get to the bottom of the issue.

Please note that the first two inquiries can turn into full inquiries if HMRC finds major inconsistencies or issues with your company’s accounts.


How do tax investigations work?

If your company is going to be investigated, HMRC will contact you through your accountant. Alternatively, they might contact you directly via letter or telephone.

If you realise there and then that you’ve made a mistake on your tax return, it’s important you admit it as soon as possible. HMRC will take your honesty into account during their investigations. Trying to cover up errors could end in more serious consequences for you and your firm.

Once the investigation is up and running, investigators might want to visit your company or even your home. Under these circumstances, we strongly advise that your accountant is present. The situation can feel quite high pressure, so having the experience and perspective of an accountant can be of great help.

The length of an investigation varies. It may be that HMRC finds everything they need fairly quickly and are able to promptly draw their conclusions. The length of an investigation can be determined by its range and the speed with which they are given information.

Most investigations that are over quickly have simple explanations. For example, if your income shrank over one month, suspicions can easily be allayed by evidence of illness or injury. But if your case is less easily solvable, the investigation will probably take longer. It will help if you get the ball rolling by replying promptly to any requests for information – you will generally be given 30 days to do so.

It’s important not to feel like you are in grave trouble. Most tax investigations simply end with HMRC informing you if you have paid too much or too little tax, letting you know if there are any penalties.


How far back will the investigation go?

This very much depends on what is being investigated and the extent of their inquiries. If HMRC believes the errors to be innocently made, they can look back at records going back four years. If they decide mistakes are the result of careless behaviour, this can be extended to six years –  with the exception of VAT which is still four years.

If HMRC believes there has been deliberate tax evasion, they can request records going back twenty years.


What are the penalties?

You may find yourself facing a penalty if your tax returns or other documents give the wrong amount of tax owed or if you didn’t notify HMRC they were taxing you at too low a level.

There are several factors that determine the level of penalty you could face:

  • If HMRC believes you deliberately evaded tax
  • If you notified HMRC about any errors made
  • How much time has passed

HMRC’s penalties come under different categories, depending on their seriousness and how the errors came about.

First, it will apply a penalty based on whether you practised reasonable care in your tax affairs or not. If you’re found to have been negligent in your duties, you can face a penalty of up to 30% of the extra tax due. This is arguably the least serious judgement.

Next, HMRC will determine whether your mistake was a deliberate error. If you made no effort to conceal your fraudulence, the penalty can range from 20 to 70% of the tax owed. If you tried to hide the deliberate error, your penalty can range from 30% to 100%.

If you feel you’re heading for a penalty, it’s possible to reduce it by being cooperative and helpful. Make sure you tell HMRC about any errors you are aware of, let them know how much you think you owe and give them swift and full access to any information they seek.


Deliberately unpaid tax

If HMRC concludes that you’ve committed tax fraud, you should ask about their contractual disclosure facility. This gives you the chance to give a full disclosure of any unpaid tax, in return for immunity from prosecution. This only applies to individuals rather than companies.

If you’ve made genuine errors and want to disclose them, the contractual disclosure facility won’t be the right path to take. Instead, cooperate with HMRC and you’ll probably just be hit with a small financial penalty.

PKB offers a tax investigation service to help businesses and individuals in the event they’re subjected to an HMRC tax investigation.

We can handle all correspondence with the tax inspector, negotiate on your behalf to ensure you pay the right amount of tax, cover the professional costs of your defence and more.

You can find out more about our tax investigation service here or by getting in touch with PKB.



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