An HMRC tax investigation can be stressful for any business, but there are ways that Framework Accountancy can help to stay on the right side of the taxman and make the process as painless as possible.
Make sure that your business aquinty itself with this quick guide to HMRC tax investigations for small businesses, with top tips on how to minimise your chances of coming under the harsh glare of the auditor’s spotlight.
Background information to understand why there may be an HMRC tax investigation?
HMRC has the right to check your affairs at any point to make sure the taxpayer is paying the right amount of tax. If your business is selected, you’ll receive an official HMRC investigation letter or phone call in which the HMRC caseworker will tell you what they want to look at. The list things that they like to look at are :
- the tax that you pay
- your accounts and tax calculations
- your Self Assessment tax return for a given year
- your Company Tax Return
- your PAYE records and returns if you’re an employer
- your VAT tax returns and records if you’re VAT-registered
As your accountants, HMRC may contact us instead of you, but as your accountants we should really be in touch to tell you about it – especially if it’s serious and find ways to answer the questions and provide information on the inquiry!
The three types of tax investigation
There are three different levels of audit that HMRC can carry out:
- Full enquiry
During a full enquiry HMRC will review the entirety of your business records, usually because they believe that there is a significant risk of an error in your tax. In investigations into limited companies, they might look closely into the tax affairs of company directors as well as the affairs of the business itself.
- Aspect enquiry
As the name suggests, during an aspect enquiry HMRC will look at a particular aspect of your accounts, for example, inconsistencies in a section of a recent tax return.
- Random check
Just as it sounds, random checks can happen at any time – regardless of the state of your accounts or whether you’ve triggered an alert.
What does a tax investigation procedure involves or takes?
During the investigation a team from HMRC will thoroughly audit your accounts and undoubtedly asking you probing questions as they do this. They might ask to visit you in person at your home, business address or at your accountant’s office. Although it’s difficult to know how long a tax investigation will last, being as cooperative as possible and willingly providing information when requested will help to keep things moving in the right direction.
What taxes can come under scrutiny or investigations ?
Many people think that tax investigations are limited to Income Tax but this isn’t the case and HMRC may want to look closely at a variety of things including:
- Corporation Tax
- Capital Gains Tax
- Construction Industry Scheme (CIS)
- Any other tax
If your business has complicated tax affairs, it’s worth investing in a good accounting software package to help make sure your accounts are always in order.
Why might the accounts being subjected to an investigation?
It’s always essential to make sure your records are as accurate as possible, but there’s an extra incentive for tackling any confusing parts of your books: unusual activity in your tax records or accounts could flag you up for an HMRC tax compliance check.
Most checks are triggered by HMRC’s Central Risk team, who use sophisticated data mining tools to spot unusual activity on accounts or trends in particular industries.
The most common trigger for an investigation is submitting noticeably incorrect figures on a tax return – so it really pays to have an accountant to offer professional advice about your accounts and check over your tax returns before you send them.
Other triggers include:
- the industry you work in being seen as “high risk”(e.g. if there are a lot of “cash in hand” transactions)
- someone alerting HMRC to unusual activity in your accounts
- noticeable inconsistencies between tax returns (e.g, a big fall in income from one year to the next)
- frequently filing tax returns late
- your accounts not matching the industry norms
You can’t always avoid a tax investigation: your accounts may simply be selected at random for investigation, even if your books are in order and you always file tax on time, so it really pays to make sure your books are always up to date and ship-shape. The tidier your books, the quicker and less painful the tax audit will be.
How far back in terms of time can HMRC go during an investigation?
The tables below shows the tax investigation time limits in years within which HMRC can go back and audit your accounts. The length of time they can go back depends on the seriousness of the investigation:
Time limit for normal behaviour, e.g. a Self Assessment random check on your tax return (years)
Capital Gains – 4 Years
Corporation Tax – 4 Years
Income Tax – 4 Years
PAYE – 4 Years
VAT – 4 Years
Time limit for careless behaviour, e.g. failure to self assess correctly (years)
Capital Gains – 6 Years
Corporation Tax – 6 Years
Income Tax – 6 Years
PAYE – 6 Years
VAT – 4 Years
Time limit for deliberate behaviour, e.g. tax fraud (years)
Capital Gains – 20 Years
Corporation Tax – 20 Years
Income Tax – 20 Years
PAYE – 20 Years
VAT – 20 Years
Top tips and Guidance for survival
Now you know the basics of what a tax investigation involves, here are our top tips on how to survive even the most thorough HMRC audit and keep your accounts in order before you receive a tax investigation letter.
Don’t put off the paperwork – keep your books up to date
The most important thing you can do is make sure that you update your business books regularly. This isn’t just because HMRC require you to do so, but it’s also essential to know what’s going on with your business finances.
When your records are up to date, not only can you pick up on crucial information quickly (such as whether customers haven’t paid you on time), you can also easily respond to any HMRC audit enquiries without the stress of searching for scraps of paper!
Here are the three most important things you can do to keep your books in order:
- Make sure your bank account balance matches the balance shown in your accounting software
If you use an accounting software connecting your bank account enables you to pull transactions across from your bank account so you don’t have to key them in manually. You can quickly check that they match to bring your books up to date.
- Keep copies of invoices for all the money you’ve received
In an accounting software, not only can you record all the invoices that you’ve sent, you can see at a glance which invoices have been paid, what’s due and overdue. You can set up automatically recurring invoices that send and chase themselves – so you can keep your accounts updated without even having to try! The invoice timeline on your accounting package dashboard lets you see who owes you what at a glance, making it far easier to chase up those pesky late-paying customers.
- Keep copies of receipts for all costs in your business – remember that in most cases, HMRC can also accept scanned receipts and invoices as part of their information gathering.
Now some accounting packages have software app and you can check on the transactions. You can also track bank payments and ‘out-of-pocket’ expenses so you can update your accounts when you’re away from your desk.
FreeAgent enables you to create a custom list of expense categories making it easier to understand what’s going on in your accounts, which will be invaluable information during an investigation.
The avoidance of the basic bookkeeping and accounting errors that might trigger an automatic tax investigation
To keep HMRC’s systems happy, it’s important to make sure that your records are not only up to date, but as error-free as possible. If you’ve had a problem lurking in your books that you’ve been vainly hoping would go away, now’s the time to ask your accountant for guidance.
Here are a few common errors that you should look out for in your accounts:
- allocating costs to the wrong category
- posting costs as out-of-pocket expenses rather than bank payments (or vice versa)
- entering the wrong amount of VAT
- treating a cost as tax-deductible when it isn’t (or the other way round)
- matching receipts to the wrong invoice
Filing of Self Assessment and VAT returns on time
Remember that HMRC is more likely to select your accounts for review if you submit tax or VAT returns late, so making sure you remain on top of your tax obligations can help you stay on the right side of HMRC.We at Framework Accountant make this really easy to do with a unique tax timeline that shows live updates of your tax position and upcoming deadlines.
As you go about your daily business Framework Accountancy works away in the background, calculating your tax liability so you can file Self Assessment tax returns and MTD-compatible VAT returns directly to HMRC from the software.
Compliance With HMRC Tax Returns
One of the best parts about staying in HMRC’s good graces is that your business will benefit from tidy, up-to-date records. You’ll not only be ready if HMRC opens an enquiry, but you’ll also know how your business is doing on a day-to-day basis. This will enable you to sort out any problems in your accounts before they become major issues and will help you to discover potential opportunities, like whether you might be able to save some tax by buying new equipment sooner
Get in touch today for a personal consultation
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