For small business owners and single entrepreneurs, an HMRC investigation can be a frustrating and time-consuming process, and it may result in a greater tax bill.

If HM Revenue & Customs (HMRC) feels your tax returns are incorrect, you may face more serious tax inquiries. You should seek professional assistance as soon as a tax investigation or inspection begins, unless you are certain of your position.

 

WHEN DOES HMRC INVESTIGATE SELF-EMPLOYED AND SMALL BUSINESSES?

HMRC intends to crack down on tax evasion and under-reporting of income. This implies they're more likely to target businesses and individuals in specific fields and industries.

When tax returns are submitted independently rather than by accountants, HMRC will conduct a tax investigation since self-employed people are less skilled than professionals and are more likely to make mistakes.

HMRC may get suspicious if your business relies on cash payments yet your return contains modest cash declarations. As a result, failing to report a source of income on your tax return may result in an investigation.

HMRC can believe that you're concealing something or that your tax return isn't complete. It's impossible to predict what would pique HMRC's interest. However, if you have a history of tax evasion or other illegal behaviour, they may be extra cautious when reviewing your return.

HMRC may see your failure to file your tax return on time as proof that you don't have your affairs in order. This could lead to an examination by HMRC.

A single error on your tax return is nothing to be concerned about. HMRC recognises that not everyone is a tax specialist and makes certain exceptions based on your ability to show you weren't tampering with the books. However, if you make mistakes on your returns on a frequent basis, submitting incorrect figures or information year after year, HMRC will become suspicious.

DIFFERENT TYPES OF INVESTIGATION

Aspect tax investigation - An investigation into specific features of a company's tax return is known as an aspect tax investigation. Aspect Tax Investigations are focused on reassessing one or more specific sections of the tax return in dispute, as opposed to the more general Full Tax Investigation.

Rather than an intentional attempt to cheat tax, the results of Aspect Tax Investigations typically indicate real mistakes or misunderstandings by the firm or people that lead to some sort of tax evasion.

Aspect Tax Investigations can be conducted on corporate records as well as the directors' and/or business owners' personal records. Aspect tax investigations, on the other hand, should not be treated lightly because, depending on the outcome, they may lead to a full tax investigation.

 

Full Tax Investigation - Full Tax Investigation is an enquiry looking into the entire tax return of a business by way of investigating the businesses records.

VAT records, payroll records, bank statements, credit card statements, purchase and sale invoices or till records, expenditure receipts, job quotes/estimates, check books, and paying-in slips are all common submissions that HMRC requests for Full Tax Investigations. They are normally only carried out when HMRC considers there is a considerable possibility of an error in a tax return due to their resource-intensive nature. As a result, when HMRC initiates a Full Tax Investigation, the receiving party should take the investigation seriously because they could be suspected of tax evasion, even if some Full Tax Investigations are conducted on a regular basis.

 

Random Tax Investigation- A random tax investigation is conducted on a person's or company's tax return at random. This is usually a complete investigation that HMRC conducts as a spot-check. In recent years, as HMRC has expanded its focus on possible tax evaders, these have grown more widespread. . Mostly , Small to medium sized Enterprises are targeted by Random Tax investigation.

 

How long does the two types of investigations take?

The usual time it takes to conduct an Aspect Tax Investigations is between 3 and 6 months, however it might take much longer in extreme situations.

The duration of a Full Tax Investigation varies based on its nature and can be measured in months; on average, a Full Tax Investigation lasts about 16 months.

 

What Happens during HMRC investigation?

If HMRC opens an inquiry against you or your company, it may examine a variety of records and documents. HMRC tax investigations typically start with one year of your company's financial statements, but they might be prolonged if they suspect the problems date back further.

The tax inspector may come to your business or accountant's office to meet with you. They may also invite you to pay them a visit. Cooperation with HMRC may have a good influence on the outcome of the investigation.

HMRC are obliged to inform you what information they want before the meeting and hence, you should discuss all this with your accountants and take proper advice from them. Answers provided to HMRC should be accurate and complete.

 

The length of the inquiries will be determined by the substance of HMRC's suspicions. They may request access to your last four years of records whether it was an honest mistake or a simple clerical error. They could, however, request access to decades of information if they suspect fraud or egregious neglect.

In most situations, HMRC can look into a taxpayer's returns over the previous four years to check if the taxpayer under inquiry owes HMRC any money. HMRC can investigate your returns for up to six years if they contain evident errors. It can also go back 20 years in your tax returns if it looks like you've been trying to avoid paying taxes on purpose.

 

 

HMRC’s criminal investigation policy

Criminal investigations will only be conducted in circumstances where HMRC needs to send a strong deterrent message or when the conduct implicated requires only a criminal consequence the goal of prosecution by the Crown Prosecution Service in England and Wales. HMRC retains complete power to conduct a criminal inquiry in any matter, and to conduct these investigations across a wide variety of offences and in all areas under the Commissioners' jurisdiction( gov.uk).

How to safeguard your business against  HMRC investigations

To reduce the possibilities of a tax investigation, your company should make sure that returns are submitted on time. Furthermore, precautions should be made to assure the accuracy of the returns supplied. Records should be retained in order to make a claim if necessary.

Consider employing Cheylesmore Accountants  if you're short on time or aren't confident in your accounting talents. We'll make sure you're up to date on all of the latest tax laws.