It is the responsibility of HM Revenue & Customs to make sure that people pay the correct amount of tax in a timely manner, and that they are given the relief and allowances for which they are eligible. This is done by carrying out compliance checks. A tax investigation may be routine, or it may be that HMRC believes your returns are incorrect. An investigation can be a time consuming and stressful period, so you may want to obtain advice from a professional if it happens to you.

Routine checks

If you are registered for VAT or have a Pay As You Earn (PAYE) scheme, you are more likely to be subject to routine checks in areas where errors commonly occur. Officers from HMRC will want to check your business records and tax returns, asking you for information to help with their checks.

Common reasons for tax investigations

If you have made an error that has resulted in an underpayment of tax, HMRC will carry out regular checks to ensure the same mistake isn’t made again. If HMRC has a reason to suspect that the correct amount of tax isn’t being paid, you may become subject to investigation.

If you are late paying your tax or submit tax returns after the due date, you may become the subject of a tax investigation. Regular errors are a sign that something isn’t right, and HMRC will want to look into the matter to help you correct any problems.

When tax returns are submitted, a large increase in expenses or a substantial fall in profits may be a cause for concern. Although it is possible for income to reduce for many reasons, HMRC may want to investigate and ask some further questions to discover the likely cause.

Further, HMRC may launch an inquiry if officers believe that your lifestyle is inconsistent with the income declared on the tax return. For instance, a large house, expensive cars and luxury holidays taken by someone who declares really low profits may cause some suspicion.

People who have offshore accounts are also more likely to become the subject of a tax investigation, or income from property. These are areas that are high risk, and also include businesses where cash is exchanged rather than other methods of payment.

Tax investigations are mainly routine, but are still time consuming either way. It is often preferable to outsource to a professional when notified of checks by HMRC.

Want to learn more?

Subscribe to our newsletter to get accounting tips like this right to your inbox

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!

More posts by this author