Worried about HMRC investigations? We’ve put together a quick guide on what to expect from an audit, as well as some background information as to why HMRC might decide to investigate a business.
Why does HMRC audit a business?
HMRC audits aren’t just for those hiding money on tropical islands to avoid tax – any business can be investigated. In fact, there are several reasons why HMRC might choose to audit a business. Some of the most common reasons include:
A tip-off e.g. from disgruntled employees
The omission of income in tax returns
Regular tax return mistakes
Several unprofitable years on record
Directors earn less than employees
You’re not represented by an accountant
Big fluctuations in figures such as profits/expenses
Your tax return figures aren’t consistent with the wider industry.
If HMRC suspects that the figures you report are not accurate (even if they are), they may choose to look into your finances.
What will HMRC look at if they audit a business?
There are three different types of audit that HMRC may conduct on a business; a full enquiry, an aspect enquiry, and a random check.
The Full Enquiry
No matter how squeaky clean this is the big investigation that all businesses fear, where HMRC analyse and review every inch of the business records. The good news is that they will usually only do this if they have a good reason to, such as if they believe there has been a serious error, or fraud has taken place.
If undertaking a full enquiry of a limited company, HMRC will often extend their investigation into the tax affairs of the company directors, as well as the business.
In an aspect enquiry HMRC investigate a specific area of the accounts, rather than everything they can find. For example, they may just look at VAT returns or your most recent tax return.
HMRC will sometimes do a random check on a business, whether anything has triggered an investigation or not. This detail is important to remember, as being notified of an investigation can be a massive source of stress, but doesn’t necessarily mean there’s anything to worry about.
What should I expect from an HMRC audit?
Even if you’ve got nothing to hide, a HMRC investigation is stressful for anyone. As part of an investigation there are several areas that HMRC may look at:
During the investigation a team from HMRC will go through all, or some, of the financial records, depending on what kind of audit they are performing. You could be asked questions about expenses, payroll, profits or beyond, and the investigators may also ask to speak with your accountant if you have one (as a client of the The Accountancy Partnership, HMRC representation in the event of an investigation is included).
How far back will HMRC investigators go?
HMRC investigations don’t just cover the current or previous year, many investigations will look at several years of records. At the moment there is a limit on the number of years HMRC can look into, depending on the type of tax and the reason for their investigation.
If this is just a routine or random check HMRC will only look at the previous four years of accounts. If HMRC is investigating negligent behaviour, they will typically look at 6 years of records. In the case of deliberate tax fraud HMRC has the right to look at the previous 20 years of business records.
What should I do if I’m investigated by HMRC?
The best approach to take with a HMRC investigation is to be cooperative and helpful. Ensure HMRC get what they need and it’ll help move things along quickly, so you can get back to normal!
If you’re looking for an accountant who can make things less stressful, why not grab an instant quote from us?
About The Author
Content creator with a keen interest in writing about business and finance - moonlighting as a fiction writer and blogger. I write content on a variety of subjects to help businesses grow.