The words ‘HMRC compliance’ are likely to strike fear into anyone’s heart, which is hardly surprising given the penalties for getting it wrong. Compliance checks aren’t that uncommon though, and can happen for all sorts of reasons.

Part of the problem is that tax jargon can be horribly complicated to understand, making any letter from HMRC seem even more scary. We’ll go over what to expect from a tax compliance check, why HMRC might have chosen your business, and who can help.

HMRC carry out compliance checks to ensure that businesses and individuals are paying the right amount of tax and at the right time. They can be random, or they might be triggered by something in particular, such as errors in your tax return.

The aim of a compliance check is essentially to make sure that your records, and what you’re telling HMRC, are a true reflection of what’s happening in the business. They’re normally fairly routine (although that might not help your stress levels).

HMRC audits aren’t just for those hiding money on tropical islands to avoid tax, and any business can be investigated. It can be completely random, or might be as the result of:

• A tip-off
• Potential anomalies, such as very low profits despite high turnover
• Regular tax return mistakes
• Frequently late submitting your tax returns or accounts
• Your tax returns showing several unprofitable years in a row (which is likely to get HMRC wondering how the business is still going)
• Directors earning considerably less than employees (and not receiving dividends)
• You’re not represented by an accountant
• Big fluctuations in figures such as profits or expenses
• Your tax return figures aren’t consistent with the wider industry

If HMRC suspects that the figures you report aren’t accurate (even if they are), they may choose to look into your finances.

Anyone can be subject to a tax audit at any time. It’s one of the reasons why businesses should retain financial records for a minimum of seven years. If HMRC want to investigate the information that your previous tax returns are based on, you’ll be ready!

Don’t panic! HMRC might simply be requesting extra details to clarify something, so the notification of an enquiry doesn’t necessarily mean anything sinister. Do give your accountant a call though – straight away.

Whilst the best approach to HMRC investigation is cooperation and helpfulness, do also check that the enquiry is within the time limits.

What is the time limit for an HMRC audit?

HMRC can only launch an enquiry once you submit your tax return, although you’re likely to have other issues if you don’t submit one! They also (normally) only have 12 months from the date that you submitted to start an enquiry.
 

HMRC will normally write or phone to tell you (or your accountant if they’re your appointed agent) about an information or inspection notice. They might request that you send additional documents to them, arrange a telephone interview, or they could request access to your home, business, or agent’s office.

 
A reasonable excuse might be as a result of serious illness, or the death of someone close to you.

Can I have someone with me during a tax audit?

Yes, if HMRC request to visit your premises or home, your accountant or legal advisor can be with you during the visit.

HMRC will normally tell you which area and time period they are interested in, although it’s a very good idea to make sure all your records are ready for scrutiny! You can ask why something is being requested, particularly if you believe a request is unreasonable.

As part of an investigation there are several areas that HMRC may look at including your bookkeeping, accounts, payroll and HR data, and tax return records. The level of detail they go into depends on what sort of enquiry they’re making:

• Full enquiry
• Aspect enquiry
• Random check

The full enquiry

This is ‘the big one’, where HMRC analyse and review every inch of the business. They will usually only do this if they have a very good reason to believe there has been a serious error, or suspect fraud.

During a full enquiry of a limited company, HMRC will often extend their investigation into the tax affairs of the company directors as well as those of the business.

Aspect enquiry

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.

Random checks

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.

HMRC investigations will often look over several years of records, although there are limits based on the type of tax and the reason for their investigation:

• 4 years for genuine mistakes
• 6 years for careless errors
• 12 years for “an offshore matter or offshore transfer”
• 20 years for deliberate tax evasion

HMRC will write to you or your agent with the outcome of any compliance checks they carry out. You might be owed a repayment if they discover that you’ve paid too much tax, or asked to make an additional payment if you haven’t paid enough (along with interest from the date it was due).

HMRC might also issue a penalty, although your particular circumstances will be taken into consideration – particularly if you made a voluntary disclosure about your tax affairs.

What is a voluntary disclosure?

Despite their extensive reach, HMRC don’t actually know everything, and rely on taxpayers proactively providing the right information. Submitting Self Assessment tax returns is a good example of this!

If you submit a tax return and subsequently realise that it contains a mistake, HMRC encourage you to come forward and make a voluntary disclosure to let them know. You can make a voluntary disclosure about any type of tax.

Can I appeal an HMRC decision?

You can (and should) appeal their decision if you think that HMRC have made a mistake. You’ll normally need to make your appeal directly to HMRC, but you can escalate this to a tribunal in some instances.

 
Tax tribunals can be a daunting process, and even if you’re reasonably confident in your abilities, you should almost certainly ask for professional help.

How can I stay HMRC Compliant?

With excellent record keeping, and professional help! Your bookkeeping and pay records should be detailed, thorough, and accurate – they’re the foundation of every tax return you submit, and business decision that you make.

That said, it’s all too easy to make a mistake, whether in your record keeping or on your tax return, particularly if your tax affairs are quite complex. An agent or advisor can help (and a good accountant will represent you if HMRC do decide to investigate).

Learn more about our online accounting services (with HMRC representation included as standard). Call 020 3355 4047 and get an instant online quote.