As mentioned above, there are a number of reasons as to why your business may be subject to HMRC tax investigations. However, the HMRC compliance checks are, generally, triggered by figures that appear to be wrong or inaccurate. For instance, a large corporation with a substantial turnover declaring a very small amount of tax. Other common reasons for the HMRC tax investigation procedure include:
- Late filings of accounts and returns, with continuous errors;
- HMRC receives a tip-off;
- Your business sector is targeted by HMRC as your company is in a high-risk industry, such as construction or property development;
- Your company costs are above the norm;
- There is a large increase in income with inconsistencies between your returns.
Whilst companies in high-risk industries and those that deal with cash are more at risk of receiving HMRC investigation letters to initiate proceedings, many businesses can be investigated. The investigation is not only limited to income tax, but can also refer to capital gains tax, insurance premium tax, landfill tax, climate change levy, corporation tax and VAT to name but a few.
The two types of investigation
There are two different types of HMRC tax investigations; aspect and full. It’s also possible that HMRC will choose a company at random to investigate.
An ‘aspect’ investigation of your tax returns is, generally, a more straightforward procedure, as opposed to a ‘full’ inquiry. In this case, HMRC may choose to investigate a particular aspect of your tax returns and request more details/information. This type of investigation often draws out a genuine mistake rather than a deliberate attempt from the business to avoid paying the correct amount of tax. However, you should still treat this HMRC tax investigation procedure as seriously as a ‘full’ inquiry and comply with HM Revenue and Customs.
A ‘full’ investigation is very serious and can lead to HMRC tax investigation penalties. In such cases, HMRC is likely to believe there is significant risk of error in the returns and possible tax evasion. A thorough review of your company records will be undertaken during this HMRC tax investigation procedure. It’s also possible that HMRC will look into the personal records of the directors/owners.
You will be informed via the HMRC investigation letter whether HM Revenue and Customs are conducting an investigation on your tax returns. HMRC can also request to visit your business premises, your accountant’s office or ask you to visit their office. In some cases, they may just ask you to answer questions on your tax records and returns. Once they have informed you of the inquiry, the review is in the hands of HMRC.
It’s important to note that you can argue against the decision to investigate your company – particularly if the misunderstanding is due to genuine error. However, you must comply with HMRC at all times.
During the investigation
HMRC tax investigations usually begin with one year of your company accounts, but they can be extended if they believe the errors go further back. It is in your best interests to respond during the time scale provided within the HMRC investigation letter. If you do not, the inspector can issue a Schedule 36 FA 2008 information notice – one of the many HMRC tax investigation penalties. This notice requires the production of documents and particulars to HMRC, and you may be charged if you do not comply.
If you are aware of any anomalies in the tax returns, we suggest bringing them to the inspector’s attention as soon as possible. This will, subsequently, save time and even money in the long-term. The inspector may also require an in-person meeting once the questions regarding your investigation have been finalised, but you are not actually obliged to attend the meeting.
The duration of full HMRC tax investigations can last almost 16 months, but that is dependent on the level of errors and adjustments identified in the procedure. If minor adjustments are identified, the inspector will advise why and how this has been calculated. You can also appeal this adjustment.
Larger adjustments are more serious, with the inspector assuming the errors go back many years. For instance, if the adjustment error arose due to a careless error, HMRC can include the previous six years in the settlement. If they believe the error is due to deliberate tax evasion, HMRC can go back upwards of 20 years.
If the HMRC tax investigation procedure pulls up adjustments, your company is likely to face HMRC tax investigation penalties. Your business can be charged for an incorrect return, with the penalty regime, generally, applying to tax and VAT returns.
While you can not properly safeguard against a HMRC tax investigation procedure – particularly if your company is in a high-risk industry – you can take steps to minimise any damage. Submit your tax returns on time and be accurate and complete, with the advice of a professional accountant. Similarly, if there has been any significant changes to the company’s income, we suggest explaining the change to HMRC before you are asked.
If you are looking for any debt management advice or guidance as to dealing with the investigation, our business rescue experts can help.