Hoping for the best and ignoring the worst is the approach many small businesses take when it comes to tax matters but being prepared and knowing what to expect can alleviate the stress, as well as saving you time and money later on.

As tax revenue is used to support the UK’s vital public services, HM Revenue & Customs’ aim is “to secure the highest level of compliance with the law and regulations”.

HMRC has a wide range of civil and criminal powers, tools and interventions at its disposal and post-pandemic is noticeably enforcing its tax policies strictly to ensure it retrieves monies owed.

HMRC can decide to pursue various enquiries into you or your company’s tax affairs at any time, ranging from looking at a particular aspect of your tax return, to a full civil or criminal investigation. The enquiries may be totally random, but it is more likely that they are triggered by a tip off (from a disgruntled employee or customer), perhaps HMRC think you have made mistakes on your tax return or that your profits fluctuate widely from year to year. Of course, they may also be prompted when HMRC suspect deliberate tax fraud.

On average, tax audits take more than twelve months to complete and cost over £5,000 in accountancy fees. Below we provide some information on how to avoid HMRC investigations but also what you can expect if you do find yourself involved in one.

Civil enquiries and investigations

An aspect enquiry checks the information on one or two specific points of the tax return by asking questions or requesting further information or evidence. Examples may be regarding interest earned on an investment or asset sale. A full enquiry means HMRC has the right to look at all of your business records and also the personal records of any, or all, company directors.

A set procedure must be followed. An Inspector may wish to visit your work premises, home or your accountant or you may be invited to a meeting. HMRC should contact you (or your accountant) in advance to specify the details of the visit and which documents or information are being requested. They will normally want to see evidence of taxes paid (and not just income or corporations’ tax); tax returns; books and accounts; and HR records. An average investigation would look at documents going back four years however, it is worth noting that HMRC has the right to request information that covers a twenty-year period. You are legally obliged to retain all documents relating to your tax returns for any given year. If HMRC suspects tax fraud has been committed knowingly, you will be given the chance to explain any tax irregularities, whether deliberate or not.

At the end of the investigation, you will receive a written conclusion. Provided any discrepancies are not considered fraudulent, you will be asked to correct the errors within 30 days.

Fraudulent or negligent conduct will result in additional tax, interest and penalties. At this point, HMRC will request you to enter a contract with them agreeing to makes these payments, or they may decide to commence criminal proceedings. We would always advise co-operation with HMRC as this will result in a reduction of penalties, avoid being publicly named and shamed and possibly avoid the insolvency of the business. Of course, if you disagree with the conclusion of the enquiry you may choose to appeal to the First Tier Tax Tribunal.

Criminal investigations

HMRC reserves complete discretion to conduct a criminal investigation in any case, however the reality is that HMRC will only prosecute when deliberate fraud is discovered.

Criminal investigations are intended to send a strong deterrent message and thus they will involve appropriate and proportionate criminal sanctions. When considering whether a case should be investigated using the civil investigation procedures as described above, or is the subject of a criminal investigation, one factor will be whether the taxpayer has made a complete and unprompted disclosure of the offences committed. So, for example, if you knew that something was wrong on your tax return you should let HMRC know as quickly as possible. Similarly, if you provide false or misleading documents to HMRC you might expect to be investigated.

Other examples of the kind of circumstances in which HMRC will consider starting a criminal investigation, rather than a civil investigation include:

  • Where an individual holds a position of trust or responsibility
  • In cases where importing or exporting goods has breached prohibitions or restrictions
  • Where deliberate concealment, conspiracy, corruption or deception is suspected
  • Where there is evidence of assaults on or threats to HMRC staff
  • Deliberate failure to file tax or VAT returns
  • VAT bogus registration repayment fraud
  • Organised tax credit fraud

Tips for avoiding an audit

There is no 100% full proof formula for avoiding an HMRC investigation, however, we would advise:

  • Communicate with HMRC – let them know why your profits are different from year to year (there is normally room on the tax return to make comments).
  • Register your business correctly – HMRC expect limited companies to have a higher turnover than a sole trader for example.
  • Make sure your accounts are logical – it will look suspicious if the receptionist earns more than the company director.
  • Be honest – millions of business file tax returns each year, some of them may disclose facts relevant to your tax return.
  • Seek the advice of tax professionals, i.e. accountants, lawyers, tax specialists – this should avoid mistakes occurring due to lack of knowledge or experience.

If you or someone you know wants more information or needs help or advice, please contact us on +44 (0)151 328 1968 or email [email protected].