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The majority of tax payers are honest and have every intention of paying the correct amount of tax but with HMRC conducting thousands of investigations annually some of which are random, you could be selected for an investigation even if you have always been compliant.

Most investigations are initiated when HMRC has noticed something they consider suspicious and warrants further investigation so it is important to keep accurate, comprehensive records and avoid raising and ‘red flags’.

HMRC use many resources to look for unusual patterns including AI and data mining software along with information from banks, employers, on-line platforms and social media.  They have even used informants to make it more difficult for tax evaders.  The most common trigger for an investigation is submitting a tax return with inaccurate figures.

Types of Tax Investigation

• Full enquiry – HMRC will review the whole of your business records, normally with the belief that there is a significant risk of an error. If they are investigating a limited company, their review may also include the tax affairs of the company directors.
• Aspect enquiry – HMRC will look at a specific aspect of your accounts or irregularities in one section of your tax return.
• Random check – These can happen at any time irrespective of how well you prepare your accounts or whether you have triggered an alert.

How does a tax investigation work?

If you are selected for an investigation, HMRC will normally notify you by letter and will include an explanation of what they will be checking.  They will request supporting documents such as bank statements, invoices and receipts and they may suggest a visit to your home or business premises.  Once they have analysed the information supplied they will decide the next steps. These investigations can last anything from weeks to months depending on the complexity of the case.

Once completed HMRC will write to you with their decision which could be any one of the following:

• No further action – everything is correct and no issues were discovered
• Repayment due – a refund will be issued
• Tax liability – you owe additional tax and will receive a demand for the difference (plus interest)
• Penalties – These can be charged depending on nature of the error, whether it was an oversight, deliberate or deliberate and concealed. HMRC may consider your cooperation during the investigation when determining penalties.
• Alternative Dispute Resolution – A mediator may be instructed if there is a disagreement or dispute over the HMRC findings
• Fraud or Criminal Proceedings – HMRC may instigate a criminal investigation in the most serious cases such as deliberate tax evasion.

How to avoid those ‘red flags’

Keeping your personal and business finances separate will keep things simpler and make it easier to identify business related expenses.  You should also make sure that you keep invoices and receipts (these do not need to be paper copies, a scan or photograph will suffice).  Make sure all expenses pass the ‘wholly and exclusively’ rule.  Unrealistic business claims are more likely to raise questions at HMRC.  Finally, make sure you file all tax returns, PAYE and VAT returns within deadlines and ensure the tax is paid on time.

For more information please contact us.