Worried about HMRC investigation? A quick guide to this process
When you run a business, one of the few things you will want to receive is a letter from HMRC stating that you are going to receive a tax audit.
What would prompt an audit?
HMRC may choose to audit taxpayers randomly to maintain overall compliance levels and deter tax evasion. Of course, there are a few different kinds of audits, which will be discussed later.
If there are inconsistencies or discrepancies in the information provided on tax returns, such as errors in reporting income, deductions, or credits, it may raise red flags and lead to an audit.
Certain industries or professions, such as self-employment, construction, hospitality, or the financial sector, may be considered higher risk due to the potential for underreporting income or engaging in cash-based transactions. So, straight away, if you are setting up as a sole trader or as self-employed, make sure that your company gets its income (and pays any staff) via bank transfer.
A substantial increase or decrease in income, significant changes in business expenses, or unusual fluctuations compared to previous years may attract the attention of the HMRC. Therefore, if your business has taken off, and you are now earning more money than you had been in the past, as a self-employed person, when it comes to filling out your tax returns, be sure to list the names of all of your clients, and state the dates when you started working for them/with them. This will showcase that you are simply reporting a change in circumstance and is, therefore, less likely to prompt an audit.
Of course, HMRC may also receive information from whistleblowers, anonymous tips, or reports of suspected tax evasion, which could prompt an audit, but in this case, you will likely need to hire some legal help, such as a fraud solicitor, to help you showcase that there is nothing untoward happening at your place of business.
So, what should you do if your company is going to be audited, and what are the different kinds of tax audits? Here’s a quick guide!
Full scope audits
Full-scope audits, also known as comprehensive audits, involve a thorough examination of all aspects of a taxpayer’s financial records. During these audits, HMRC scrutinises income, expenses, deductions, and credits reported on tax returns to ensure compliance with tax laws. Full-scope audits are typically conducted when there are significant concerns about a taxpayer’s compliance history or if substantial discrepancies are identified.
Aspect inquiries focus on specific areas of a taxpayer’s financial records or specific tax issues. HMRC may select an aspect inquiry to investigate a particular item on a tax return, such as capital gains, rental income, or business expenses. These audits allow HMRC to concentrate their efforts on specific areas of potential non-compliance or high-risk activities.
Business records checks
Business records checks are designed to assess the adequacy and accuracy of a business’s record-keeping practices, and this kind of investigation can be triggered if there have been many issues with previous tax assessments. During these audits, HMRC will review your financial records, such as invoices, receipts, and bank statements, to ensure they are complete and comply with the record-keeping requirements. Business records checks aim to encourage good record-keeping practices and identify potential areas of tax non-compliance.
So, if you keep getting business record check requests, then your best bet to prevent them long-term is to hire an accountant for your business, as they will be trained in conducting audits and will be the person who gets notified and queried if there are any future problems with your tax returns, which is a weight off!
Random audits involve the selection of taxpayers on a purely random basis. So, if you receive one of these, there is not really anything to worry about. HMRC conducts these audits to maintain overall compliance levels with businesses, deter tax evasion, and ensure fairness in the tax system. Random audits serve as a preventive measure, as they create an element of unpredictability and act as a deterrent for potential tax evaders.
Desk audits, also known as office-based audits, are conducted remotely by HMRC without visiting the taxpayer’s premises. In desk audits, HMRC requests specific documents or additional information from the taxpayer to verify the accuracy of the tax return. These audits are often less comprehensive and more focused on specific issues or items of concern. So, if you receive a letter stating that you are going to have a desk audit, in most cases, all you need to do is send HMRC bank statements, which can be done digitally or via mail.