Tax investigations, unfortunately, are a fact of business life for the self employed. H M Revenue & Customs (HMRC) will usually insist that tax investigations are completely random. However, they do take note of certain indicators, which may prompt them to select a particular business or individual for investigation.
HMRC publishes Business Economics Notes that show what they believe should be the normal gross profit rate for a particular kind of business. These notes also tip off the tax inspector about the most common forms of error or deliberate evasion within that industry.
Another factor that can attract the interest of the tax inspector is the late filing of accounts and returns. This can be particularly galling for the self employed having already been made to pay a fine for such a late filing. HMRC seems to have found that in many cases where accounts are late, there are other problems with the business’s basic accounting records. This enables them to discredit the accounts supplied and substitute the taxable profit with a higher, idealised figure.
Some small business accountants also dislike tax investigations and may struggle to find the time to deal with them. Many such accountants work as sole traders and do not have the resources of a national accountants firm to deal with the long lists of queries that the investigating inspector will routinely raise as part of an investigation.
It cannot be stressed how important it is to keep on top of a business’ accounting records. Good communication with your accountant is vital although this does not have to mean regular meetings whose cost has to be incorporated into the accountancy fees as the essentials can now be done online thanks to online accounting.
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Content Writer working alongside our expert accountants to bring you the latest Tax and Accounting news.