How to Prepare Your Business for HMRC Tax Investigations

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The most important thing to take away from this blog is that the tax process does not simply end with filing your tax return on time and correctly. Even if everything appears to be in order, HM Revenue & Customs (HMRC) has begun taking extra steps to ensure that firms are paying the correct amount of tax. 

Avoiding errors and fines in tax investigation

Through random selection, a tax probe can be begun at any time. This can be costly and time-consuming, especially if you are appealing a judgement that was made in HMRC’s favour. 

We will discuss: 

  1. The need for accurate record-keeping 
  2. The necessity to understand tax
  3. The resources available to assist you to prepare for a HMRC tax investigation 

What is a tax investigation?

A tax investigation is an in-depth investigation processed by a tax authority to recover tax undercharged in previous years of assessment. It is carried out when a taxpayer is suspected of tax evasion, or just by random sampling. 

Why do tax investigations happen?

HMRC is pursuing every possible method to close the tax deficit. The tax gap is the difference between the amount of tax collected and the amount of tax that could be collected in the UK. This is done to maximise revenue to pay for public services. As a result, the number of probes into SMEs has increased. 

According to Anna Mikhailova of the Telegraph, HMRC investigated half a million small firms in 2018. HMRC faulted 46% of SMEs for the £34 billion in tax it failed to collect in the 2015/2016 tax year. 

What methods does HMRC use to look into tax evasion and avoidance?

Reasons HMRC will investigate your financial situation: 

  • Inconsistency with the industry’s pay scales
  • Leaving money on the table
  • You’ve made a lot of mistakes on your tax returns 
  • The compensation of a dubious director
  • Between years, there has been a considerable decrease in margins 
  • You can be chosen at random (even if your records are fine) 

In rare circumstances, such as when they suspect tax evasion, HMRC can go back up to 20 years. They can cross-reference different sources of data linked to corporate income thanks to smart technology. This means they can quickly spot anomalies in tax filings and initiate inquiries. 

What happens during a tax investigation by HMRC?

If HMRC decides to investigate, they will send you a letter in which they will ask you a series of questions. You will be obliged to provide them with the information they need. However, you do have the right to question their choice to look into your affairs if you believe their reasoning is flawed. HMRC will investigate where and how any irregularities may have arisen. 

Because some cases are the consequence of reporting errors, they can be easily corrected and closed. Others demand a thorough audit, complete with requests for bank and credit card transactions to back up your tax return. This is typically inconvenient and can take a long time. 

The majority of inquiries lead to the identification of taxpayers who are underpaying their taxes. The requirement thereafter is to pay what is owed, normally within 30 days, with interest applied to the balance if necessary. If HMRC discovers purposeful wrongdoing through evasion, criminal charges may be brought. 

 3 things you may do to reduce the chances of noncompliance:

  • Seek the help of a skilled counsel 
  • Organise and maintain correct records
  • Investigate and comprehend your tax requirements

Seek the help of a skilled counsel 

Finding the right and proper financial advisor for your company will help you save money and time. If you’re the subject of a tax inquiry, your advisor will be the one to help you figure out what’s going on and come up with a suitable solution. They will likely be the difference between paying a hefty fine and avoiding one. 

Organise and maintain correct records

Accounting records are an important part of establishing and managing a small business. On a day-to-day basis, proper bookkeeping processes will help you maintain strong customer and supplier connections. They will also give you the necessary information to make strategic company decisions. 

You will be able to locate the relevant information to prove you’ve declared and paid the proper amount of tax if you’re subjected to an HMRC audit of your records. This is something that the correct online accounting software may be able to assist you with. 

Investigate and comprehend your tax requirements 

Many SMEs find taxation a difficult process. It is critical to understand your responsibilities, tax relief eligibility, and HMRC’s expectations. If you don’t know how much you owe, how can you know if you’re paying the proper amount?

You cannot wait for HMRC to let you know about your blunder. In terms of an inquiry and any fines, this will be costly. Underpaying taxes is a terrible decision for the same reasons. Make sure you plan ahead of time so you know exactly what your tax obligations are.


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