Tax Investigation 101: What you need to know
A recent tax investigation case that we assisted with prompted us to consider what exactly business owners know about HMRC tax investigations. Those involved in the tax industry are well familiar with how HMRC investigate, but it became apparent that a sizeable portion of our clients are understandably hung out to dry when HMRC come knocking.
An unfortunate truth is that HMRC do not need a specific reason to launch a tax investigation into your company affairs, and with the events of the pandemic impacting the daily lives of many it may be possible that you have inadvertently overstepped some crucial tax laws. The Tax Investigation process itself can be complex and daunting, but this blog will aim to serve as a useful insight into how these investigations work and why they may be carried out.
Typically HMRC tends to flag activity that they deem as suspicious, such as:
- Dealing with companies who have been guilty of tax offences
- Mistakes made on tax returns
- Irregular trends in your annual accounts
- Discrepancies between management and employee pay
- Any tipoffs from a third party
These are just a few of the large number of reasons HMRC can cite to put you under investigation. They can even initiate an investigation randomly which may feel unfair, but you must know how to respond correctly and prevent collecting penalties and other consequences.
Investigations will always follow the same formula:
- The taxpayer will be notified. HMRC will always provide written notice before they carry out the tax investigation into your affairs. A deadline for your response will also be specified in the notice and tends to be within 30 – 35 days of the notice.
- Request for records and supporting documents. Records such as bank statements, payslips, company accounts, VAT returns and other relevant financial papers will be requested. The scope of the volume of documents required tends to vary based on the type of investigation launched, which we will outline later on. What is otherwise known as ‘enquiry periods’, HMRC has the power to ask for old records that are no more than 4 years old at the time of discovery. However, should you be deemed to have caused a tax offence carelessly the window is increased to 6 years, with deliberate offences giving HMRC a leeway of 20 years. Matters related to offshore transactions are limited to 12 years.
- Investigation period. The type of investigation is a contributing factor to the duration of a tax investigation. Furthermore, the nature of the company/ business trading accounts also decides on the period in which HMRC can keep the investigation open. This can be anywhere between a few months to as long as 16 months.
Compliance with HMRC during the investigation does go a long way, as it quickens the process and also could lead to reduced penalties should you be found guilty of tax offences. As mentioned beforehand, investigations can come in the form of three distinct formats:
- Random Tax Investigation. As the name suggests, this is an investigation performed randomly on the tax return of an individual or company. HMRC use this as a method to ‘spot-check’ businesses in high-risk sectors to discourage tax avoidance and abuse. As a Small to Medium-sized Enterprise (SME), you may be a likely target from these random checks.
- “Aspect” Tax Investigation. HMRC can narrow their scope onto a particular ‘aspect’ of your business’ returns. These types of investigations tend to focus on non-malicious mistakes or misunderstandings, rather than deliberate tax evasion. As the investigation itself is not very broad, the process is cheaper and as a result, tends to be quicker. Though, bear in mind that this does not mean HMRC will not hesitate to open a full investigation should they have reason to believe other aspects of your business is worthy of review.
- Full Tax Investigation. An expensive, comprehensive and potentially lengthy process where HMRC will look into all business and financial records, for the relevant years of enquiry under the suspicion of tax evasion.
Failure to comply and/or provide appropriate documents can lead to damaging penalties. HMRC will penalise you using the following reasons:
- Mistakes in your financial accounts
- Deliberate understatements and concealments
- Failure to take reasonable care.
Late filing of your tax returns will incur a flat-rate penalty of £100, which increases substantially for successive months of late payment. You want to avoid this as this will affect your cash flow, especially if you have a significant turnover. HMRC can also threaten with criminal proceedings against you or your business. If you feel that an imposed penalty is unfair, you have 30 days to file an appeal to contest the charge with a reasonable excuse. This is not something to be relied upon, given the government’s history with strict guidelines on what classifies as a qualifying excuse.
You must take these enquiries seriously and seek the assistance of a certified tax advisor immediately. At WIM Accountants we have the expertise and accreditations to make sure your tax investigation does not damage you or your business. We will ensure that your case is represented correctly and accurately; that HMRC will receive the documents they asked for promptly to quicken the process and mitigate any possible penalties; and that you can relax knowing your tax affairs are in the hands of individuals with a combined 25 years of experience in the tax sector. Feel free to contact us if you have any questions or would like more information on how tax investigations work.