Are you the target of an HMRC tax investigation?

The words 'tax investigation' may make you nervous. In actuality, if you've been maintaining good records, getting your firm audited by HMRC shouldn't be too difficult.

Although it is rarely a stroll in the park, this guide can help you reduce a potentially frightening experience into a merely time-consuming one.

What exactly is a tax investigation?

A tax investigation occurs when Her Majesty's Revenue & Customs (HMRC) decides to look into your firm's finances in order to guarantee that the company is paying the correct amount of tax, both currently and in the past.

It is a legal process that requires your cooperation, but it does not mean that you have done anything illegal. A tax investigation should not be too onerous or time-consuming if you have strict accounting practises in place and a good accountant.

How do I find out if HMRC is looking into me?

Every tax investigation begins with a brown envelope labelled 'HMRC' being delivered via your letterbox.

Depending on the purpose for the investigation, your company's documents will be scrutinised to varied degrees.

The letter will inform you whether the examination is limited to a certain component of your tax return or a more thorough probe into your overall tax affairs. Inquire with your accountant about the reasons for the investigation.

HMRC will at the very least want to clarify a specific component of your tax return. However, if they wish to undertake a comprehensive investigation, you must provide financial documents.

These are most likely to be:

• Statements from banks and credit cards
• Invoices or records of sales
• VAT documentation
• Chequebooks and pay stubs
• Estimated price or job quotes
• Payroll documents
• Purchase invoices and expenditure reimbursements

If your records are digitally saved, HMRC may request access to your software system as well as a copy of your data.

The length of the tax inquiry procedure is largely determined by how much evidence HMRC wants to examine.

Smaller tax investigations often take three to six months to complete, however larger investigations might take up to 16 months.

Reasons for your tax investigation

HMRC may want to look into your finances for a variety of reasons, so you should not assume that they are accusing you of wrongdoing.

Tax is rarely simple, and HMRC does not seek to penalise companies that make honest mistakes.

The following are some of the most prevalent causes of a tax investigation.

Errors and omissions

On your most recent return, you may have neglected to check a box, paid too much (or too little), skipped a section, or omitted to include the necessary supplemental information.

HMRC will conduct an investigation to determine the source of the inconsistency. If you have the necessary documents, you should be able to remedy the issue quickly and go back to running your business.

You live in an HMRC priority area.

HMRC may be looking more aggressively at certain industries where there may be tax gaps, or you may check a box that they are particularly interested in (for instance if you have multiple sources of income).

You have been identified as a risk.

Certain events, such as cash trades or large amounts of capital flowing into and out of the owner's personal bank account and the business account, set off the HMRC risk-based selection procedure.

HMRC is looking into you.

Obviously, HMRC will look into any proof of fraud or criminal conduct, but a variety of innocent behaviours may also appear suspicious until adequately explained.

For example, if your costs exceed your income, or you are always late filing your tax return. HMRC suspicion may also play a role in how far back they investigate your accounts (see below).

The time limit for HMRC tax investigations

You might be wondering how far back HMRC can investigate your accounts.

HMRC will normally review your accounts and tax submissions up to four years prior to the commencement of the investigation and collect any unpaid tax from this period.

However, if it discovers that you have been reckless (for example, making mistakes on your tax returns on a frequent basis), it can go back up to six years. Even so, if HMRC detects willful tax evasion, it may review the previous 20 years of accounts if they are accessible.

As a result, it is usually better to keep as many years of accounts as feasible.