Whether you are a sole trader, partnership or a limited company, an investigation carried out by HM Revenue & Customs has serious repercussions on a business. Your business may be seriously disrupted by a tax investigation, while a personal tax self assessment investigation can be prolonged and intrusive. If information has been deliberately withheld from HMRC you may receive a fine, but could also receive a prison sentence. A tax investigation is usually prompted where HMRC have reason to believe that the information given in your tax return or business accounts are incorrect. This could be that the tax return has been submitted late or perhaps the figures provided don’t agree with other information which is held by HMRC.
A random number of self assessment tax returns are selected to be investigated each year. More than 15,000 tax returns were investigated in the first two years of self assessment being in existence. Prior to a tax investigation taking place, HMRC will contact you to inform you, but they won’t tell you the reason for the investigation. If the tax investigation is conducted under self assessment, an enquiry must be started within a year of the last filing date 31st January. However, the investigation doesn’t have to be completed during that time, with some investigations taking years to complete.
A tax investigation will usually be carried out by specially trained inspectors of HMRC, who know what to look for. They will treat all information provided as confidential, only giving information to permitted third parties like your accountant or other tax adviser. It is possible that HMRC will require information from other parties like suppliers, former employers and colleagues as part of the investigation. Although HMRC don’t usually give you information regarding the tax investigation until complete, they may specify areas which they feel require closer examination. If the problem has occurred as a result of a simple omission or error, providing sufficient evidence may be all that is needed to conclude the enquiry. However, any underpaid tax will be payable immediately together with interest and penalties which have mounted.
Being informed of an imminent tax investigation can be alarming but you should keep calm, possibly engaging the assistance of an accountant or tax specialist who will deal with HMRC on your behalf. A reputable adviser will also understand the operations of HMRC and will be able to help you through an investigation. One of the most obvious pieces of advice is not to lie to HMRC as they will undoubtedly discover any information which has been withheld. HMRC has a number of resources and the latest technology available to gather evidence during a tax investigation. Co-operation with HMRC and thorough preparation for any meetings is also advisable, so that information may be provided.
Thorough book keeping is required by HMRC who will want to see that your records are kept in order. According to HMRC inadequate tax records are one of the biggest causes of errors and omissions from a tax return and accounts. Completing and submitting your self assessment tax return in a timely manner is also advisable, especially during a tax investigation. Making the correct payments on account is also advisable to let HMRC know that you are willing to comply with the system. If you have made an error or omitted vital information from your tax return, pay the tax which is due, pay the penalties and interest due and don’t reoffend.
Outsourcing the administration for your business is the most cost efficient and effective way to ensure full compliance with HMRC in a timely manner. A tax investigation is stressful and can be a time consuming process, affecting you and your business.
Want to learn more?
Subscribe to our newsletter to get accounting tips like this right to your inbox
About The Author
An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.