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What to Expect with a Tax Investigation

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HMRC enquiry activity is more focused and better targeted than ever before, and tax inspectors have become far more aggressive in their pursuit of additional tax.

HMRC has launched 137,000 tax investigations in the six months to December 2021, up 9% from the 126,000 investigations in the same period last year.

In 2020-21, HMRC collected £30.4 billion through compliance activity error, avoidance and evasion. An investigation can be hugely costly if you don’t have a fee protection agreement in place with your accountant, even if HMRC finds your tax affairs are in order.

If you’re a Blue Rocket client, however, you benefit from our Asteroid Protection booster, giving you peace of mind knowing that should you ever be investigated, you can be sure that you will have the highest level of representation from our team without worrying about escalating expenses. Find out more about Asteroid Protection >>

An HMRC tax investigation can also be stressful for any business, but there are ways that you can make the process as painless as possible.

Here’s our guide to HMRC tax investigations for small businesses.

What is an HMRC tax investigation?

HMRC has the right to check your business affairs at any point in time to make sure you’re paying the correct amount of tax. If your business is selected, you’ll receive an official HMRC investigation letter or a phone call in which they’ll outline what they want to look at. This could include things like:

  • the tax that you pay
  • your accounts and tax calculations
  • your Self-Assessment tax return for a given year
  • your Company Tax Return
  • your PAYE records and returns if you’re an employer
  • your VAT returns and records if you’re VAT-registered

If you use an accountant, HMRC may contact them instead of you, but your accountant should be in touch to tell you about it.

What are the three types of investigation?

There are three different levels of audit that HMRC can carry out, these include;

1.   Full enquiry

During a full enquiry, HMRC will review the entirety of your business records, this is usually because they believe that there is a significant risk of an error in your tax calculations. When investigating limited companies, they might look closely into the tax affairs of company directors as well as the business itself.

2.   Aspect enquiry

As the name suggests, an aspect enquiry means that HMRC will look at a particular aspect of your accounts, such as an inconsistency in a part of a recent tax return.

3.   Random check

These can happen at any time, just as the name suggests, regardless of the state of your accounts or whether an alert has been triggered.

What does a tax investigation procedure involve and what do they look at?

During the investigation, a team from HMRC will audit your accounts and ask you a variety of questions. They might ask to visit you in person at your home, business address or at your accountant’s office.

Many types of tax can come under scrutiny, HMRC may want to look closely at a variety of things including:

  • VAT
  • Corporation Tax
  • Capital Gains Tax
  • Construction Industry Scheme (CIS)
  • IR35

If your business has complicated tax affairs, it’s worth investing in a good accounting software package to help make sure your accounts are always in order. This is also helpful with Making Tax Digital right around the corner.

Who is at risk of an investigation and how is it triggered?

Any unusual activity in your tax records or accounts could flag you up for an HMRC tax compliance check.

Most checks are triggered by HMRC’s Central Risk team, who use the sophisticated Connect System to identify unusual activity on accounts or trends in particular industries.

The most common trigger for an investigation is submitting incorrect figures on a tax return, so it’s essential you use a chartered accountant to manage your tax returns, or at the very least request they check over your tax returns before you submit them.

Other triggers can include:

  • the industry you work in being seen as ‘high risk’ (e.g. common for those which deal with a lot of cash in hand transactions)
  • someone reporting unusual activity in your accounts to HMRC
  • noticeable inconsistencies between tax returns (for example, a big fall in income from one year to the next)
  • frequently filing late tax returns
  • your accounts being inconsistent with industry norms

Your accounts may simply be selected at random for investigation, even if your books are in order and you always file tax on time.

Everyone is at risk of a tax investigation. With random checks becoming more frequent and the desire of HMRC to close the UK tax gap; tax investigations are on the rise. This coupled with the post Covid-19 attempts of businesses to cut back on essential business services leave companies and directors wide open to the above risk factors.

Our Accounting Top Tips:

Now you have a better understanding of what a tax investigation involves, here are our top tips on how to keep your accounts in order.

Keep on top of your bookkeeping

It’s vital to update your business books regularly. This isn’t just because HMRC requires you to do so, but it’s also essential to know what’s going on with your business finances.

When your records are up to date, not only can you pick up on crucial information quickly (such as whether customers haven’t paid you on time), you can also easily respond to any HMRC audit enquiries without the stress of searching for scraps of paper.

Here are the three most important things you can do to keep your books in order:

  1. Check that your bank account balance matches the balance shown in your accounting software
  2. Keep copies of invoices for all the money you’ve received
  3. Keep copies of receipts for all business costs

Avoid basic accounting errors that might trigger an automatic tax investigation

It’s important to make sure that your records are not only up to date, but as error-free as possible. If you’ve got a problem in your books, ask your accountant for guidance.

Here are a few common errors that you should look out for in your accounts:

  • allocating costs to the wrong category
  • posting costs as out-of-pocket expenses rather than bank payments (or vice versa)
  • entering the wrong amount of VAT
  • treating a cost as tax-deductible when it isn't (or the other way around)
  • matching receipts to the wrong invoice

A reliable and HMRC approved accounting software can help you avoid these errors. Blue Rocket Accounting offer a variety of cloud-based accounting software systems that we can setup or manage for you. Contact us to find out more >>

File your Self-Assessment and VAT returns on time

Remember that HMRC is more likely to select your accounts for review if you submit tax or VAT returns late.

If you don’t yet have an accountant and you feel that your books are getting on top of you, or your current accountant is letting you down, get in touch with Blue Rocket Accounting. Our team of accounting experts can not only reduce the increased ‘risk factors’ of the likelihood of being selected for an investigation, but if are contacted by HMRC, will support you through the process and remove the cost of fees with our Asteroid Protection service.

Speak to us today and find out how we can support what’s important to your business.

To find out more, please get in touch with our team by calling 01322 555 442 or via email happytohelp@bluerocketaccounting.com.

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