Many businesses will face a routine tax audit and or investigation in the life span of its trading, generally after five years from the company commences to trade. More serious tax investigations are likely if HM Revenue & Customs (HMRC) suspects your tax returns are incorrect. Tax audits and tax investigations can be complex and extremely stressful.
How likely is a tax audit or investigation?
You should expect routine tax audits if you are registered for Value Added Tax (VAT) or have employees paid through Pay as You Go (PAYE). The tax audit will check your records and systems, focusing on areas where mistakes are common.
The focus is more on tax investigations where HMRC has reason to believe you are either making errors or deliberately hiding income.
On average, tax audits can be expected every five years. In some cases, it can be longer depending on how efficiently the business manages its finances and submissions to HMRC.
Although only a few per cent of income tax and corporation tax returns are investigated each year the frequency of tax audits and the likelihood of in-depth tax investigations increases if HMRC suspects that tax isn’t being fully paid.
- Costs are unusually high for the type of businesses in your industry
- The filing of your tax returns is late, pay tax late or make errors that need correcting
- There are inconsistencies or substantial variations between different returns, such as a large fall in income or increase in costs
- Offshore bank accounts
- High-risk industry such as businesses that routinely take cash payments, or an industry that HMRC has decided to target (Restaurants, Pubs, Takeaway food shops, convenience stores)
- HMRC receives a tip-off
- Tax returns are inconsistent with how busy your business is or your standard of living
- Income from property
You may want to contemplate taking out insurance to help protect you against the costs of a tax audit or tax investigation or joining a business association that offers this as a benefit to other ongoing services.
Notification of a tax audit /investigation
A tax audit will start with a letter asking for some information around the concerns HMRC have. They will usually want to visit you at the trading address from where the company is based and check you prime accounting records.
With a tax investigation, the letter will be sent to you advising you whether HMRC is investigating a specific aspect of your tax return or carrying out a full tax investigation. Your accountant will also be able to tell why there is a tax investigation (e.g. whether they suspect tax fraud).
Dealing with HMRC
Always take professional advice upon the first letter having been received on how to respond to requests for information and documentation. You may find it best to deal with as much as possible in writing, through your accountant or another third party who has expertise with HMRC matters. Do not enter into any telephone conversations or unaccompanied meetings with the tax inspector without a third party being present.
The tax audits are generally quicker to deal with and you can ask your accountant to check through your records and systems to determine the accuracy of the documents and figures submitted. It is also quicker and in most cases does not lead to penalties if accurate information is provided at the time of the visit by HMRC.
Full disclosure is the key. You must not make up stories or destroy evidence. This will only lead to more enquiries, request for more detailed information and serious penalties. Always think about making payments on account towards any likely tax amounts to reduce the amount of interest charged on the overall debt. The objective is to negotiate an agreement as soon as possible without the need for incurring any excessive costs and charges.
Once a tax investigation has started, it can last several months or more. It may in some cases lead to enquiries into the directors’ personal tax affairs. Your accountant can advise you what to do if HMRC is asking for too much information, taking too long or otherwise behaving unreasonably.
If you want to find out anything further about this topic then please feel free to call on 01494 786000, 0207 240 2000 or 07961 116321. All conversations will be in strict confidence. You can also email firstname.lastname@example.org.
This article is for information and interest only. It is not a substitute for full professional advice, which will take in to account the specific and individual circumstances. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.