It's happened. Despite everything you've heard about how unlikely it is and the many strategies to avoid it, the day has arrived. The familiar brown envelope stamped “HM Revenue & Customs” has landed on your doorstep. You open it up, and to your disgust it's not a tax rebate or a Christmas card – you've been picked for an HMRC tax investigation.
This article outlines what you can expect throughout your investigation. Critically, how you can get access to the necessary help and guidance to alleviate some pressure too.
Let's start by exploring the weeks, months and years prior to your investigation. Some of the answers you're looking for are likely to reside there.
Before the investigation
Perhaps unhelpfully, there are a long list of reasons as to why you've been picked for an HMRC investigation. It's worth understanding them all, as this will dictate how you prepare yourself and your business.
Firstly, HMRC has the right to assess your activity at any stage, they do this to ensure that you're paying the correct amount of tax. During FY 2019-20 alone, tax compliance activity generated an additional £36.9 billion in revenue which would have otherwise gone unpaid. In other words, HMRC make a strong return on their investment when it comes to employing full-time compliance officers whose job is to do just that – check that companies and individuals remain compliant!
Now that we know why these investigations take place, we can take a look at how HMRC goes through the process of selecting who they want to investigate. These are some (not all!) low-hanging fruit examples for compliance officers:
- Year-end accounts figures that appear to be wrong, or that contradict the expected norms. For example, a large business with a sky-high turnover declaring a very small profit, or a huge VAT claim for a smaller business.
- If you work in a high-risk industry, you are more likely to be contacted for compliance checks. This includes your typical cash-in-hand businesses such as construction, hairdressing and pubs etc.
- Obvious inconsistencies and disparities between one set of accounts and the next. E.g. a dramatic reduction in turnover over a short period of time.
- Frequent late submissions.
- HMRC being notified of fraudulent activity by an informant.
PLEASE NOTE: around 7% of HMRC investigations are carried out at random. This means that despite your previous record or how well you adhere to the rules, you can still be picked anyway!
During the investigation
Tax investigations are split into two categories, each consisting of a different ‘level' of required detail. These are aptly named ‘aspect' and ‘full' enquiries, the lesser and more involved respectfully. Typically speaking, an aspect enquiry will focus primarily on one element of the subject's affairs and can be expected to last for between 3-6 months. Conversely, a full enquiry is likely to encompass multiple facets of both the subject business and its associated directors. It may continue for anywhere up to and beyond 12 months.
Throughout the investigation, you can be asked to:
- Provide all information and documentation required, including but not limited to: bank statements, accounts and tax calculations, VAT records, payroll records, expense claims, credit card statements, asset lists, cash reserves, personal financial records.
- Reply to all correspondence within a reasonable (agreed) timeframe.
- Meet with your compliance inspector at their premises, your premises or even your accountant's.
It goes without saying, enduring an HMRC investigation is both emotionally draining and extremely time consuming. When faced with the more involved investigations in particular, owner-managed businesses can feel the consequences of this disruption. This comes in the form of reduced productivity and in the worst-case, a near breakdown of their day-to-day operations for the duration of the enquiry.
What could happen to me?
It's worth reiterating here that, as discussed previously, HMRC may wish to take a closer look at your affairs for a variety of reasons. These range from random selection or an eyebrow-raising anomaly, right through to a distinctive, consistent pattern of behaviour that suggests intentional tax fraud. Equally of note, is the fact that HMRC do not want to punish those that make honest mistakes. It's not a witch hunt.
They will work closely with you and your accountant to conduct their research, establish a satisfactory answer to their queries and act accordingly thereafter. If you are found to have been non-compliant, you will face a penalty – the severity of which varies greatly depending on the seriousness of the offence committed. The seriousness of the offence will be categorised as follows:
- An honest mistake has been made despite taking reasonable care.
- An honest mistake has been made in the absence of reasonable care.
- Deliberate wrongdoing has occurred that has not been concealed.
- Deliberate wrongdoing has occurred that has been attempted to be concealed.
In the majority of cases, you will be asked to pay what you owe and fined for your troubles. In the more serious cases such as proven fraud however, criminal convictions can occur.
After the investigation
To mark the end of an investigation, a decision notice or contract settlement will be issued. A decision notice can present itself in the form of a penalty notice or written assessment. A contract settlement is a formal (legally binding) agreement to recover money owed – similar to a repayment plan on a defaulting finance agreement.
If you're found to be fully compliant, no fine will be issued, you'll (hopefully) be thanked for your time and sent on your merry way.
In the event you are found to be non-compliant, much like before the investigation happened, you now have a choice! The strongly advised approach is to repay what is owed, then conduct a serious review of your internal processes to establish the root cause of your non-compliance.
How can my accountant help?
In terms of the investigation itself, your accountant can deal with HMRC on your behalf, allowing you to avoid the breakdown of your day-to-day operations. This means you can continue running your business, totally uninterrupted. They can:
- Respond to HMRC queries in a timely fashion.
- Fulfil requests for documentation and ensure that the information handed over to HMRC is limited to that which is necessary.
- Prepare for and attend phone calls and meetings with your tax inspector.
- Ensure you get a fair case in which the basis for their inspection is correct.
- Provide insurance to cover all fees related to your HMRC investigation.
What about after the investigation?
In general, your accountant can help by offering to assist with the day-to-day running of your business. They should be proactively advising best practise on your affairs, including but not limited to payroll, bookkeeping, VAT and both corporation tax and self-assessments. They can also be highly responsive to your needs and offer consultation on your specific tax position and general questions.
If you find that you're not getting the help you need, and for general peace of mind – get in touch with us here for an exploratory discussion.