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HMRC tax investigations are an unfortunate repercussion of starting your own business. Even when there’s no apparent reason for an inspection, you could still become subject to one.

It can be a scary feeling to be investigated, but while you might be breathing into a paper bag, it’s important to know these are a regular occurrence for growing companies.

Businesses who are new to tax returns will make more administrative errors or file incomplete returns. And as your profits are likely to have dramatic changes in the first few years, it’s common for young companies to come face-to-face with the taxman.

How to reduce your chances of an inspection

Luckily, there’s a few things that can reduce your likelihood of being investigated, or at least help you if it does happen to you.

Rule number one: keep those accounts squeaky clean. Be completely transparent with your tax affairs, and make sure your accountant has a good credibility rating. Good records, tidy accounts and clear tax returns are all the ingredients needed to keep HMRC at bay.

HMRC often focus on ratio analysis, where a business’ figures are having a dramatic changed from one year to the next. If your business experiences financial fluctuations, use the extra space on your tax return to explain these unusual variations in turnover or profit.

Going that bit further to explain will help your case if it needs reviewing, and won’t give HMRC reason to believe there has been misconduct.

Different types of tax investigations

Some tax investigations are more serious than others – although you shouldn’t take it lightly if you’re investigated for any reason. Listed below are the types of investigation you may be most likely to face.

Full Enquiry: This is one of the most extensive investigations undertaken by HMRC. It includes an examination of your Self Assessment Tax Return, with a comprehensive review of all books and records regarding the assessment in question.

Aspect Enquiry: This type of enquiry regards one or more aspect of your Self Assessment Tax Return. Rather than reviewing the full assessment, HMRC clarifies particular entries or the records relating to those entries.

Tax Compliance Checks: Compliance checks can concern Income Tax, PAYE or VAT. HMRC investigates your compliance with tax affairs, to make sure you’re paying the full amount of tax. HMRC will notify to which aspect of tax they’re looking in to, which gives you opportunity to appoint a relevant representative to deal with HMRC on your behalf, although this is not a necessity.

VAT Disputes: Disputes are slightly more severe than enquiries and checks, as here HMRC are directly challenging the accuracy of your returns. A VAT dispute will feature a disagreement from HMRC about the amount of VAT you owe or the way you have operated your VAT.

PAYE/NIC Disputes: Likewise, this is a challenge to the accuracy or completeness of your Pay As You Earn payments.

IR35 Disputes: This investigation concerns your IR35 status and whether you should be subject to Intermediary legislation. If you are found to be inside IR35 you will owe the PAYE and NICs you would have paid as a full-time employee. For more information about IR35, download our guide here.

Business Inspection Notice: This it notice of HMRC exercising their right to request entry to inspect your business’ premises and goods as well as assets and documents. Inspection is undertaken with the approval of an authorised officer and may be on short notice or with no prior warning.

What to expect during an inspection

HMRC will send you notice of any impending investigations, and will give you the opportunity to use representation for the inspection. During the investigation, HMRC will take away your records and return them with questions. They tend to only investigate one year’s accounts, although this may depend on your situation.

If you receive notice of a HMRC investigation, the first thing to do is tell your accountant. They will be able to advise you as well as give you representation throughout the inspection. If your accountant is unable to help, seek professional advice as soon as possible.

Don’t get panicked if your business comes under investigation. It’s easy to start worrying and try to convince your accountant that burning all records is the only thing to do. Just stay calm. If you’ve made a mistake in your return then you need to communicate with HMRC. Penalties are sometimes reduced if you comply, so be upfront about all your affairs if you suspect you’re in the wrong.

Possible outcomes

The outcome of the inspection depends on HMRC’s findings. The results can vary from no action needing to be taken, to penalties being applied or even a criminal offence charge.

Your next steps will depend on this outcome, so it’s wise to keep an open line with your accountant so you are able to consult them for advice.

Have you been the subject of a HMRC tax inspection? Leave your experiences in the comment section below!

About The Author

Karl Bilby

We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!

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