HM Revenue & Customs (HMRC) has in recent years increased its focus on limited companies, as the government attempts to recover lost tax revenue and penalise or discourage companies from tax evasion.
Unfortunately, a business cannot eliminate the threat of a tax investigation and can be chosen at random for a routine check, but some may be targeted by HMRC for a number of different reasons. This can be a lengthy, expensive and often painful experience for the business and their accountant.
What could potentially trigger a tax investigation?
Although HMRC can conduct random checks, there are various factors that could lead HMRC to begin a tax investigation, mainly if HMRC suspects that tax is being underpaid.
Tax investigations are more likely if;
- A tip off is received from a third party
- Regular mistakes are made on tax returns
- Persistent late filing
- Numbers fluctuate by large margins
- A significant change in figures from one year to the next
- A vast difference in figures from other businesses in the same industry
- Directors earn less than employees
- Running a cash based business
Not everyone is a tax expert, so it is important to have the right information and representation through an accountant. Being proactive with your accountant and explaining any changes to HMRC as soon as they occur can help alleviate any suspicions that may arise and potentially prevent any need for further inspection.
Two types of Investigation
There are two different levels of investigation, an ‘Aspect’ or ‘Full’ investigation. As the name suggests, in an aspect investigation, HMRC will focus on a particular aspect of a company’s tax return. Whereas a full investigation will cover all of the company’s business books and records and can be a more lengthy process.
What happens during an investigation?
HMRC will start the process by sending the company or accountant (if appointed agent) in question a notification of inspection. They may request a visit to the registered or trading address, or even ask for the Director to visit the HMRC office. They can follow this by a request for tax returns and records and respond with specific questions in relation to this.
It is better to bring any anomalies or mistakes to the inspector’s attention at the start, which can help alleviate further pressure and reduce future penalties. The company must never assume that HMRC can’t access certain information, although they don’t have a legal right to some things, they do have wide ranging powers to access data from third parties.
An investigation will normally require the company to provide a part of the accounts and records, but can then be extended to cover a year or more depending on the length the errors have been made. There may also be further visits to business premises or requests to meet at a HMRC office.
A HMRC investigation can be a daunting experience for any business and early advice and representation should be sought. The main point of call will be the accountant, who in most cases will already act as the agent for the company.
Providing as much information when requested, but also rectifying known mistakes early on will help reduce any future penalties that can be levied. HMRC will conduct random checks on businesses, but the chances of being investigated can be reduced if accounts are done on time, any mistakes are rectified quickly and income is properly taken.
If your clients find they owe significant amounts after an investigation, then Bridgewood can provide advice on options to deal with the liability. For more information, please don’t hesitate to contact me on 0115 871 2921 or by email firstname.lastname@example.org.
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