If you’re a self-employed trader or a limited company, HM Revenue and Customs (HMRC) may occasionally conduct a tax investigation into your business to ensure that you’re paying the correct amount of tax. These checks are likely to increase in the years to come.
How HMRC Conducts Tax Investigations
HMRC has the legal right to conduct checks on tax affairs. The £100m ‘super computer’ called HMRC Connect monitors the digital footprint of businesses that have potential discrepancies between their income and tax payments. This computer draws on third-party information, including bank accounts, council tax records, land registry, eBay, and internet adverts, which tax officers may then compare to information on returns.
HMRC can also use other methods to determine whether a tax investigation is necessary. For example, HMRC may receive a tip-off from a disgruntled employee or supplier or receive information from a third-party data provider. HMRC’s advanced data analytics capabilities also allow them to detect anomalies in returns and identify those businesses that have the potential for underpayment or non-payment of taxes.
Length of HMRC Tax Investigations
The duration of investigations depends on the areas of a business being scrutinized. If it is just one area, the investigation tends to last around six months. If HMRC is forced to conduct a Full Enquiry into multiple areas of a business, it can last up to 18 months or more. The lead times for HMRC dealing with other tax enquiries have been extended due to the significant resources being employed in dealing with Covid Fraud.
What to Expect During an HMRC Tax Investigation
Receiving a formal notice of enquiry from HMRC is the first indication that they wish to investigate your business’ tax affairs. This notice will informally request information by a certain date. If HMRC does not receive the information it has informally requested, it can follow up with a formal information notice with a short timescale to supply the outstanding information. HMRC’s tax investigators are permitted under certain circumstances to liaise with third parties regarding your business operations, as well as employees.
The areas of a business that may be investigated include self-assessment tax returns, PAYE records (employers only), VAT returns, accounts and tax calculations, and company tax returns. The tax investigators will review your business accounts and records in detail and may have questions to ask regarding your income and expenditure. These may be asked face-to-face or via telephone or email. You aren’t legally obliged to meet face-to-face, but sometimes this can help the investigation to advance. This may sometimes extend into HMRC asking about personal finances if they establish that a client’s lifestyle doesn’t match their reported income.
HMRC will notify you once the tax investigation has concluded and inform you of the outcome. Any discrepancies will be noted, and you may be charged penalties and interest if any tax has been under-declared. Penalties can be as high as 100% for those found to have displayed deliberate or fraudulent behaviour, but in less severe cases, these penalties can be lower.
HMRC’s Investigation of Covid Support Schemes
HMRC is placing significant emphasis on investigations into the potential abuse of the Government’s coronavirus business support schemes. Approximately 12,828 enquiries were launched up to the end of March 2022, and HMRC contacted over 63,000 people via one-to-many campaigns. In the March 2021 Budget, the Chancellor pledged an additional £100m in forming a specialist fraud taskforce for the Government’s coronavirus support packages. As part of this funding, HMRC recruited an additional 1,100 new staff to become a part of this dedicated Covid-19 support scheme fraud task force. HMRC has warned that it will take action against those who have abused the schemes, including imposing penalties and launching criminal investigations.
In addition to investigating potential fraud, HMRC has also been reviewing businesses that have made mistakes in their claims for support. In some cases, these mistakes may have been unintentional, but they could still lead to an investigation and penalties if they result in underpayment or non-payment of taxes.
How Your Accountant Can Help
If you are worried about the possibility of a tax investigation, you should consider seeking professional representation from your accountant. Southside Accountants Wimbledon offers a Tax Investigation Service for a small annual fee, which will protect you against additional professional costs, stress, and uncertainty brought about by an HMRC enquiry.
In addition to providing representation during an investigation, your accountant can also help you to prepare for a potential investigation. This may include reviewing your business records to ensure that they are accurate and up-to-date and identifying any areas of concern that may trigger an investigation.
Your accountant can also provide advice on how to respond to an investigation notice from HMRC, including how to provide the information requested and how to communicate with HMRC investigators. Your accountant can also help you to negotiate with HMRC and to challenge any penalties that may be imposed.
Conclusion
A tax investigation by HMRC can be a time-consuming and stressful experience, but with the right support, you can navigate the process successfully. By understanding how HMRC conducts investigations and what to expect during an investigation, you can prepare yourself and your business for a potential investigation. Seeking professional representation from an accountant with experience in tax investigations can also provide you with peace of mind and protect you from the financial and emotional costs of an HMRC enquiry.
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