The words ‘HMRC investigation’ are enough to make the heart of every business owner miss a beat. Your mind conjures up images of men in suits scouring your office until they find every last receipt and invoice.
The truth is that as long as you are a reputable business and have your paperwork up to date, there really is nothing to worry about. Inspectors are only interested in tax fraud, not a receipt for that sausage roll you bought in a hurry from a motorway service station five years ago.
“When people hear from the HMRC, they immediately fear the worst,” says Emma Roberts from OneClick Accountant. “However, there is rarely anything to be worried about and your accountant should be able to make the whole process as stress free as possible.”
To help you, Emma has produced the following six-step essential guide…
1. What is a HMRC investigation?
Every now and then HMRC conducts financial audits of businesses, focusing on tax payments. You will first be contacted by phone or email, and then be asked for certain financial information. HMRC has a legal right to see your personal and business finances, so you need to comply with their requests.
There are three types of HMRC investigation:
- Full enquiry: covering every area of your tax history
- Aspect enquiry: focusing on one tax area, such as VAT
- Random enquiry: a series of arbitrary checks.
When they have all the information, HMRC will begin to probe deeper by checking your business accounts with spending and your personal finances. All the work is done by the HMRC, all business owners have to do is provide the information promptly when requested.
2. How long are HMRC investigations?
This can depend on the size of the business and the size of any problem that arises. Typically, the process for a small business with correct financial records can be as short as three months. If HMRC uncovers any signs of tax fraud, the investigation can run into years.
3. What can I do to prepare?
If you think that you might have done something wrong, you will add to get professional advice from an accountant and a solicitor. Any illegal activity will be uncovered, so it is always best to admit wrongdoing at the earliest opportunity.
If you have done nothing wrong, then you have nothing to worry about. But you will find that being prepared can ease the worry that any HMRC investigation might cause you, while also making the job of the HMRC easier and quicker.
Here are a few preparation tips:
- Tax planning: show that you understand your tax liability with clear records
- Documents: collect all the paperwork ready for the inspectors
- Professional advice: your accountant can guide you through the process
- Self-audit: don’t wait for HMRC, ask your accountant for a thorough tax audit.
4. I have lost some records, what should I do?
Fire, theft or moving premises can all lead to financial records going missing. The good news is that in today’s digital world, most of your financial information will be stored somewhere online.
However, if you can’t find a particular document, you need to inform your accountant and HMRC. There might be a way to get the information from another source or to show spending elsewhere. Remember that auditors are trained to find fair and reasonable outcomes.
5. Is there a time limit on HMRC investigations?
The short answer is no. Generally, if your latest tax records are all clear, the investigation will end. If auditors do spot an error, they can extend their scope to the previous four or six tax years, especially if they suspect fraud.
Once they find evidence of illegal activity, they can undertake a comprehensive investigation going back up to 20 years.
6. What are the penalties?
If HMRC inspectors uncover that you have underpaid tax through a genuine mistake or negligence, you will need to pay the full amount back. There will be no further legal action as HMRC is focused on ensuring UK businesses fulfil their tax obligations, not dishing out punishments.
However, if auditors suspect deliberate tax avoidance or financial fraud, you could be charged with a criminal offence, potentially leading to fines, a court hearing or even a prison sentence.
“People often assume that because they have been selected for a tax investigation that they’ve done something wrong,” adds Emma. “Nine times out of 10 this is not true as businesses are chosen at random by HMRC, who simply want to survey a wide selection of UK businesses.
“If you have kept up with your tax payments, you will have nothing to fear. But if you do have concerns, it is well worth speaking to your accountant.”