The thought of facing a HMRC tax investigation worries most business owners. But if you have been reporting your financial matters correctly, there’s nothing to fear.
Of course, tax investigations take time – even if you do have everything in order. And that’s why business owners shudder at the thought of an investigation.
With Rachel Reeves pledging to invest over £500 million into HMRC extra investigations before the election, chances are more businesses will be receiving a letter over the coming years! That’s because the National Audit Office reckons £5.5 billion of taxes was lost in 2022-2023. And it states that 81% of that is from small businesses.
And latest figures show that the tax agency paid out nearly £1 million for tip offs! So they’re clearly taking tax fraud seriously.
So, let’s take a look at what you need to know about HMRC tax investigations.
What are HMRC tax investigations?
An investigation from HMRC is simply the tax authority taking a detailed look into your company’s and sometimes your finances. There are a number of reasons why your business might be chosen for an investigation. But if you’re aware of those reasons, you can rest easy knowing you’re not being unfairly targeted.
HMRC can legally check your affairs to ensure that you and your company are paying the correct amount of tax. Businesses that are selected will receive an official letter from HMRC or a phone call.
Be aware that with increasing numbers of scam calls, HMRC will never call to ask you for bank details or to request you make payments over the phone.
The investigations are not limited to income tax. Investigators will also be looking at:
- Company Tax returns
- Taxes you pay
- Accounts and tax calculations
- PAYE records and returns, if you’re an employer
- VAT returns and records
Types of tax investigations
There are three levels of tax audits that HMRC carries out. These are:
- Full enquiry
- Aspect enquiry
- Random check
Full enquiry: If HMRC carries out this enquiry, your entire business records are reviewed. This is usually because they believe there is a significant risk of error in your tax. Company directors of limited companies may find that HMRC looks at their tax affairs as well as those of the business. This is the most time consuming enquiry.
Aspect enquiry: This enquiry is when HMRC believes there is a specific aspect of your tax return that needs investigating. That could be because they believe there is a discrepancy in your tax return or a change in your company’s activities. It is usually less intrusive than a full enquiry but is often time consuming.
Random check: As the name suggests, you and your business may not have any issues. But HMRC selects a small percentage of tax returns to investigate at random. They usually only look at the past four years of accounts.
Why I might face HMRC tax investigations
There are several reasons why you might be investigated by HMRC. Don’t assume they are accusing you of criminal activity and trying to catch you out. Tax affairs are not simple, so HMRC will often check that any discrepancy is an honest mistake. These are the most common reasons for HMRC investigations…
Mistakes and omissions. A simple case of forgetting to tick a box may lead to an inconsistency. And that can mean you’ve paid too much tax as well as not enough! If you have your documentation in order, it should be a quick problem to resolve.
Your business is in a target area. Some sectors are under more scrutiny from HMRC than others because the industry has a reputation for tax shortfalls. Another reason is that you ticked a box that says you have more than one income. In which case, they are likely to be more interested in your tax affairs.
You’re deemed a risk. Trades that deal with cash payments are often seen as a risk of avoiding tax. Also, if you have had high levels of money going into and out of your personal and business accounts, HMRC may decide to investigate.
You’re raising alarms. If you’re always late submitting your tax return or have expenses that are higher than your income, HMRC will become suspicious. That could trigger an investigation.
What about tip offs?
Although HMRC receives many tip offs they can’t investigate them all. In 2023/24, 151,763 anonymous tips offs reporting tax fraud were received. But HMRC doesn’t have enough staff to investigate every one of them.
That means if you get a letter, then it’s either down to an error, your type of business or it’s a random choice. If everything is in order, you don’t have anything to worry about. If it isn’t, then don’t leave until you receive a letter!
Preparing for an investigation
If you are being investigated by HMRC, then you must be prepared to put time and resources aside. Ignoring it will only make things worse. Like any project, you need to budget time to get everything together, so may need to pass other work to colleagues.
Make sure you bring in extra accounting help. Accountants understand the jargon so you won’t feel overwhelmed by any questions HMRC asks.
If you would like more information or help, you can contact our team today.
