Being the subject of an HM Revenue and Customs tax investigation is stressful in the best of circumstances. Still, there are ways to minimise the risk of being selected for review and keep any tax liability arising from the audit to a minimum.
Late filing, delayed tax payments, and errors in tax returns can all trigger an HMRC audit. Inconsistencies or significant variations between different returns, such as a significant decrease in income or cost, can also cause an investigation.
How likely is it to get investigated by HMRC?
HMRC receives approximately 12 million self-assessment tax returns annually and carries out around 300,000 investigations, implying that one in every 40 returns submitted is reviewed. Businesses can expect to be reviewed once every 5 years, with investigations into VAT returns and employer company records being the most common targets.
A business type may be targeted as it is considered a high-risk industry. The building trade has long been singled out for HMRC’s attention because of the mobility of the workforce and the amounts of money exchanging hands in contracts. Hence, businesses in that sector are more likely to see reviews than most others.
Occasionally HMRC will be acting on a tip-off.
HMRC have invested significant sums into technology and data analysis software to target investigations on a risk assessment basis. It is important to check any submissions made to HMRC for errors and, if necessary, explain anything that might appear unusual.
Does HMRC do random audits?
Yes, HMRC carries out random investigations for several reasons, but it is estimated that only 7% of audits are selected randomly. There is usually something in the accounts or tax returns that have been flagged up as unusual.
How are audits triggered?
In addition to identifying obvious errors, submissions such as a self-assessment tax return, PAYE submissions, tax returns or accounts for a limited company are reviewed for unusual activity and substantial variations, such as a significant fall in income.
Higher risk areas include claims for Research and Development tax credits or aggressive tax planning schemes. A business is likely to receive more scrutiny than a private individual.
In recent years, HMRC has been liaising with overseas tax authorities to exchange information about taxpayers with assets in other jurisdictions. HMRC will often have detailed information about offshore bank accounts and other assets, which can cause them to contact the taxpayer.
When a taxpayer has been identified under the risk assessment process, an HMRC officer will review the records and contact the taxpayer for further information.
HMRC may issue an information notice to a third party where either the taxpayer is not cooperating, or the third party has essential information needed in the investigation.
What happens in an HMRC tax investigation?
A routine tax audit will generally start with HMRC writing to the taxpayer requesting further information. This may be as simple as clarifying a particular aspect of the return (aspect enquiry), or full records may be requested without identifying any specific aspect that is being targeted (full enquiry).
The letter will also establish the area of tax law under which the investigation comes. Some investigations can carry criminal penalties, although the vast majority of HMRC enquiries are civil matters and rarely result in legal action.
There may be a need for HMRC to take a detailed look through the tax records so that the Inspector may ask for the records to be sent to them or could ask to visit the taxpayer. Visits have become less common since Covid and would not apply to individuals undergoing a personal tax investigation.
More minor investigations can generally be dealt with by letter or email, but the Inspector may want to discuss the case with the taxpayer and their staff in larger reviews. Ideally, we would want to avoid anyone having to speak directly with an Inspector. You are within your rights to ask for any meeting to be held at your accountant’s office.
Whilst it may delay resolving any issues, keeping everything in writing has better outcomes because you have the time to consider the responses to HMRC that is not present in a phone conversation or face-to-face meeting.
What should I do if I receive an enquiry letter from HMRC?
Number one – don’t panic! In most cases, tax investigations can be resolved quickly.
Not every letter HMRC sends asking questions is a tax investigation. An investigation letter should refer to Section 9a Taxes Management Act, for enquiries into self-assessment tax returns. It is important that HMRC refer to that section because taxpayers are given certain protections under that legislation.
Whilst it is tempting to deal with the response yourself, it pays to get professional advice to ensure you fully understand what HMRC are seeking.
If the letter refers to the investigation being carried out under Code of Practice 9 (COP9), this indicates that HMRC are classing the activity under investigation as tax fraud, and you may need to obtain the services of a legal adviser who is experienced in COP9 cases.
Before you provide any information to HMRC, speak to your accountant or legal adviser to establish your rights and identify any problem areas that HMRC may be looking at.
What information will I need to supply?
An HMRC tax investigation can look at a wide range of tax records. The initial letter will detail the documents and information that is being sought. This may be bank accounts, legal documents relating to transactions, accounting records, invoices, receipts and payroll records.
HMRC cannot request information that does not relate to calculating your tax liability. However, the requested financial records can be wide-ranging, especially regarding business records.
Once HMRC has your records, the investigation may raise more questions. Enquiries can run for years, especially a full investigation and those looking into a business.
What happens at the end of an HMRC tax investigation?
Once HMRC concludes their investigation, it will contact the taxpayer to discuss any issues identified. A genuine mistake will generally result in only the additional tax to be paid.
Where behaviour is identified as careless, or HMRC considers it has found tax avoidance, penalties may be applied, which will be added to the amount to be paid.
If you disagree with the findings of the tax Inspector, you should have the opportunity to appeal against any liability calculated.
How can Butt Miller help you?
If your tax affairs are selected for a review, our team has many years of experience in dealing with questions that could be raised in HMRC tax investigations and understand the tax angle of any questions HMRC may be asking.
Our team at Butt Miller can guide you through the process of responding to HMRC’s questions and can act as a buffer between you and the Inspector to reduce the stress an investigation puts on you, your family and your team.
If your business is experiencing frequent tax audits, we can work with you to identify why you are on HMRC’s radar and develop solutions to reduce the risk profile.
Prevention is better than cure, so a good accountant should be helping to minimise the areas that flag up as a significant risks for HMRC tax investigation.
If you’re having trouble with setting up a government gateway account, check out our blog about it.