The words “tax inspection” are enough to send chills down the spine of any small business, even if you have nothing to worry about. While a small percentage (just 7%) of HMRC investigations are random, the majority occur because they suspect something is wrong. Here’s our guide to what an investigation involves, why your business might be involved in one and, crucially, how to avoid one.
They’ve picked up on an omission: If you’ve made a mistake, no matter how little, the chances are HMRC will pick it up. If you’ve filed a tax return and realise you’ve made a genuine mistake, you’ll be able to update your return within twelve months of the original deadline. Anything more than that, though, could be a problem. This is why it’s crucial for small businesses and self-employed individuals to take every care to not give HMRC cause for concern, either by keeping records diligently or by using a tax accountant for small businesses.
You’re in a target area: HMRC sometimes set up taskforces targeting a specific geographic area or a specific sector thought be at risk of tax fraud. For years, accountants have claimed that the HMRC focus on so-called “soft targets”, such as professionals anxious about underpaid tax and therefore more likely to settle quickly.
You’re attracting attention: With so few investigations conducted on a random basis, if you’re faced with a tax inspection it might be because you appear a risk to the HMRC. Are you claiming a lot of amount of expenses in relation to your income? Or do you have an income that constantly fluctuates? If so, you may have a reason, but be aware that these things can attract unwanted attention.
If you’ve been selected for an investigation, you’ll receive a letter from the HMRC. If this happens, you must read the letter carefully. We advise talking to our small business accountant in Milton Keynes. We have years of experience of successfully helping individuals and small businesses during this demanding time.
Your letter will tell you exactly what the HMRC need. In a full inspection, they will take your records away to conduct a thorough investigation. How long this will last will depend on the circumstances of each individual case. If the HMRC has additional questions or concerns, the process could take several months.
The HMRC will typically go through your accounts for the last year. However, if there’s cause for concern, they can go back to more than five years ago. Often an inspection finds nothing, so there will be no outstanding payments to make, but an investigation can be a major inconvenience, especially if you’re a small business.
While there’s always the small chance that your business will get randomly selected for investigation, there are steps you can take to minimise your risk and ensure you don’t alert the HMRC:
The deadline you should file your returns by will depend on the method you choose. If you send your tax returns on paper, ensure they’re sent off by the 31st October. If you submit online, you have slightly longer, until the 31st January — the same date your tax payment is due. It’s good practice to always submit your return on time, not only to prevent the HMRC from investigating you but to prevent late penalties, which can be a minimum of £100 (or more if your return is over three months late).
Any discrepancy between your return and your income will ring alarm bells. Ensure you keep a record of all expenses and income, and take the time to make sure you input these accurately when submitting your return. A tax accountant for small business can help you develop a system and manage your tax returns for you, not only taking away additional stress but minimising the risk of a HMRC investigation.
If your income fluctuates from one year to the next, or you are claiming more in tax-deductible expenses, this could attract the HMRC’s attention. It’s important, to be honest and transparent and declare any reason why your gross profit has significantly grown. Has your company recently moved offices, and at the same time have you taken on more new staff? This could account for a considerable increase in expenses.
These are steps you can take independently or with the help of a tax accountant for a small business. But in what other ways can an accountant help?
We can help by explaining the process of HMRC investigations and collating all the information required for your investigation. In addition to this, we can deal with the HMRC on your behalf, responding to further requests for information and negotiating a final settlement, if payment is required. This ultimately gives you more time to focus on your business.
It’s worth mentioning that an accountant can only work with the records he or she is given. The onus is on the business to ensure its records are accurate and kept up to date. That being said, our accountants in Milton Keynes can help you develop a system to keep on track and recommend tools to make your record-keeping process more efficient.