What happens when a business triggers a tax investigation?

Triggers of an HMRC tax investigation
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    The thought of receiving an HMRC investigation letter can be a worrying prospect. Even if you and your business are fully compliant, you could face a random inspection. Being prepared and knowledgeable about the tax investigation process is essential to help it go smoothly and be resolved quickly.

    During a tax investigation, HMRC scrutinises tax records to ensure the correct tax has been paid. You must provide business records as requested, and you may be interviewed. The scope of the tax investigation depends on what triggered it, the type of investigation and the nature of the breach.

    In this helpful article, we’ll guide you through the tax investigation procedure step-by-step so that you can be better prepared if HMRC decides to investigate your personal or business tax affairs.

    At AudTax, our tax investigation specialists have an in-depth understanding of UK tax law and can help you navigate the intricacies of tax investigations. For professional advice and personal guidance on your business’s tax affairs, contact AudTax today.

    Why do HMRC carry out tax investigations?

    HM Revenue & Customs carries out routine and data-led tax investigations to combat tax avoidance. While most businesses pay their tax accurately and on time, some individuals deliberately attempt to commit tax fraud, i.e. misrepresent their earnings or conceal information, to avoid their tax liability.

    This is, of course, a significant concern for HMRC as it hinders the tax system, deprives the Government of revenue and compromises the fairness of financial responsibility.

    It is understandable to be concerned if HMRC wants to investigate your finances. But, by understanding what HMRC look out for, you can proactively ensure compliance and avoid potential issues further down the line.

    Three different types of tax investigation

    There are generally three different levels of tax inspection, as follows:

    Full enquiry

    A full enquiry is triggered when HMRC suspect a significant risk of irregularity in your tax records. This is highlighted using various methods, such as data analysis, risk profiling and information gathered from third parties. It is a comprehensive investigation where all business records are examined, and sometimes the personal tax affairs of company directors.

    Aspect enquiry

    Aspect enquiries are typically more focused than full enquiries and are triggered when HMRC suspects an issue with a particular aspect of your tax affairs, e.g. your company VAT returns.

    Random check

    HMRC carries out several random checks each year, so you could be on the receiving end of an inspection even if your tax records are faultless and up-to-date.

    What triggers an HMRC tax investigation?

    While they can be daunting, a tax enquiry doesn’t necessarily imply any wrongdoing. Sometimes, HMRC will conduct a random tax investigation to ensure that businesses and individuals are compliant and paying the right amount of tax.

    So what are the common red flags that trigger a tax investigation?

    • Errors or inconsistencies in tax returns
    • Sudden changes in income, or income that is outside industry norms
    • Undeclared income
    • Higher than usual business expense claims
    • If you file tax returns late
    • If you pay tax late
    • If you use offshore bank accounts
    • If you operate in a ‘high-risk industry’, i.e. one that deals largely in cash payments

    What type of tax return can be investigated?

    HMRC can investigate various types of tax, including:

    Business tax

    • Corporation Tax
    • Value Added Tax (VAT)
    • PAYE (Pay As You Earn)

    Personal tax

    • Income Tax
    • Capital Gains Tax
    • Inheritance Tax

    Overall, HMRC has the authority to investigate any type of tax return if there are concerns about potential non-compliance, errors, or fraudulent activity. The scope and depth of the investigation will vary depending on the specific circumstances of each case.

    How likely is an HMRC investigation?

    Various factors influence the likelihood of facing an HMRC tax investigation, and random checks are common. You can avoid the inconvenience of receiving frequent tax audits by completing your Corporation Tax and Self-Assessment tax returns accurately and paying the right amount of tax on time.

    What are the stages of HMRC tax investigations?

    The stages of an HMRC tax investigation vary depending on the severity of the enquiry – whether they are looking into a specific tax return, a particular aspect of your tax affairs or a more in-depth tax inspection.

    Here’s a breakdown of the HMRC tax investigation procedure:

    1) Contact from HMRC

    HMRC will contact you (or your accountant) in writing or by phone to officially notify you of the tax inspection. They will detail what they wish to inspect, e.g. a specific Self-Assessment tax return, tax or VAT returns or PAYE records. They may wish to conduct a full enquiry, which is a much more in-depth process.

    2) Submit the required documents

    The tax inspector will request access to certain financial documents and company records related to your tax returns, business transactions and finances.

    The type of documents depends on the nature and scope of the tax investigation but typically include all or some of the following:

    • Bank statements
    • Invoices
    • Expense receipts
    • Payroll records
    • If you are VAT registered, your VAT records

    Your professional tax accountant can assist you in gathering the correct documents.

    3) Visit or an interview

    A formal interview may be requested to clarify certain aspects of your tax affairs and examine your financial records in greater detail. This may be done at your home, place of work or accountant’s office.

    Interviews usually occur in more complex investigations, and you can let HMRC know if you don’t think a visit is necessary. You may be able to appoint someone else, such as your accountant, to talk to HMRC on your behalf.

    4) HMRC analysis

    During this part of the tax audit, HMRC will analyse the information provided, cross-reference tax returns and identify any inconsistencies or errors in your tax calculations. This analysis helps them determine whether your business’s tax records are accurate and whether any outstanding tax is owed.

    5) Outcome of the tax investigation

    HMRC will detail the outcome of the investigation, bringing it to a quick close if they find that you have been compliant.

    You will be repaid, with interest, if you have overpaid tax. However, if you have underpaid tax, you will be expected to repay the amount due with interest and may receive a penalty notice.

    What should you do if your business is being investigated?

    If HMRC investigates your business, then approaching the situation with diligence and transparency will smooth the way for a quick resolution. Forward-thinking business owners can make their lives easier by keeping track of all income and expenses and storing well-organised and up-to-date records.

    Tax investigations can be worrying, but you don’t have to face them alone. Seeking professional guidance from tax experts like AudTax can make the process smoother by helping you gather the correct information for HMRC and know your rights.

    How long does the HMRC investigation take?

    HMRC tax investigations can tax anywhere between a couple of months to over a year, depending on how much information they need and the type of investigation, i.e. a full investigation, aspect enquiry or random check.

    Smaller investigations and routine tax audits typically take less time, especially if you cooperate and respond to requests efficiently.

    Is tax investigation insurance worth it?

    Tax investigation insurance is a policy that covers the costs if HMRC inspects you or your business. It doesn’t cover any unpaid tax, interest or penalties, but it does cover the additional accountancy fees required to oversee the tax investigation procedure.

    AudTax offers cost-effective tax investigation insurance to give you total peace of mind, should you receive notice of a tax audit by HMRC.

    Get on the right side of HMRC with AudTax tax consultants

    As a responsible business owner, you understand the importance of HMRC compliance and keeping on top of your tax liability. Although they can be lenient when genuine mistakes happen, continuous slip-ups can raise unnecessary red flags leading to more frequent tax audits.

    At AudTax, we are experienced accountants specialising in tax compliance and HMRC investigations. Not only will our expert team guide you through each stage of the tax investigation process, but we’ll also ensure your business finances are in the best possible shape to begin with.

    Get in touch today to learn how we can help you avoid the costly penalties of an HMRC tax investigation and give you peace of mind.

    Conclusion

    HMRC tax investigations are there to ensure your business is and has been paying the correct amount of tax. While they can be stress-inducing, a tax investigation doesn’t always mean your business has done something wrong. However, in the event of an investigation, it is crucial to stay informed and cooperate to ensure a quick resolution.

    Ensuring your tax returns are filed on time and your records are regularly updated will prepare you for any enquiries from HMRC.

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    Picture of Shahood Ahmed BSc, FMAAT, AFA MIPA

    Shahood Ahmed BSc, FMAAT, AFA MIPA

    Shahood is a fully qualified accountant, and holds UK memberships in numerous accounting bodies. Having worked in many accounting roles, he decided to set up his own practice to provide clients with the best accounting services, offering sound business advice.

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