Routine tax audits tend to be more straightforward than tax investigations, and generally target VAT and PAYE record-keeping systems. Tax investigations can be very complex and usually happen when HMRC suspect inaccuracies, whether deliberate or accidental.
- Your returns show a sudden significant fall in income or increased costs
- You miss the filing or payment deadline, or make an error on your return
- The costs declared are considerably higher than average for your sector
- There are anomalies between the information provided and your lifestyle/volume of business
- You receive property-related income
- Your particular industry has been targeted as part of an HMRC campaign
- You take frequent cash payments, or are in a high-risk industry
- HMRC have been tipped-off
- You have an account with an offshore bank
You can mitigate the cost of an investigation by taking out insurance, or signing up with a business association that offers this as part of their membership.
Notification by HMRC
HMRC will send a letter of notification. In the case of an investigation they will let you know the area of concern, or if they intend to carry out a full investigation. Your accountant will be able to offer advice and help you prepare.
How to deal with an audit or investigation
Tax audit: your accountant can examine and advise on your record-keeping systems before the audit takes place.
Tax investigation: it is strongly advised to seek professional advice at every stage, including your reply to the initial request for information. Your accountant can guide you through the entire process, which is invaluable if you believe that HMRC is being unreasonable.
A corporation tax investigation may also include scrutiny of directors’ tax affairs, and can last for months rather than weeks. The overall aim is to come to an agreement with HMRC that suits both parties and keeps costs low.