Many businesses will face a routine tax audit from time to time. More serious tax investigations are likely if HM Revenue & Customs (HMRC) suspects your tax returns are inaccurate.
The first you will know about a tax audit or tax investigation is when HMRC contacts you. The letter will include a deadline for your response, which should be given in writing. For a tax audit, they will normally want to visit you and check your tax records.
It’s in your best interest to respond within timescale given in the letter from HMRC. If you do not respond within the timescale given, the inspector can issue a formal notice, which orders the production of documents and particulars to HMRC.
If you do not comply with such a notice you will be charged a monetary penalty.
Normally, a tax enquiry must start within 12 months of the due date for the tax return it relates to or 12 months after you actually filed the return, if you missed the due date.
You should expect routine tax audits if you are registered for VAT or have employees paid through PAYE. The tax audit will check your records and systems, focusing on areas where mistakes are common.
Tax audits and tax investigations can be complex and very stressful. Unless you are very sure of your position, you should take professional advice as soon as a tax investigation or inspection starts.
Tax inspections happen for a variety of reasons or you can be selected completely at random. Often however, an investigation is initiated when HMRC believe something is wrong e.g. if you are always late with submitting your self-assessment or you have high expenses in relation to income.
HMRC will usually request submission of all records maintained by the business for the year of enquiry, this includes such things as bank statements, sales invoices / till rolls, VAT records, quotes or estimates, expense receipts and payroll records.
The average duration of a full investigation is around 16 months whereas an aspect investigation (which only looks at part of a tax return) usually lasts between 3 – 6 months, but can take longer.
You can be asked to attend a meeting with the inspector, you don’t have to attend and the inspector can’t force you to do so, but a meeting is often the quickest and simplest way to progress an enquiry.
Once the investigation is concluded, if no issues were found then no action will be taken, however it may well have still cost you money in accountancy fees for the services they provide you with to comply with the HMRC requests.
If a minor adjustment needs to be made, the investigator will amend the submission and advise of the amount due, including any penalties.
Where larger adjustments are required, the inspector can use the presumption of continuity to assume that the same error had occurred in all your returns. The level of adjustment sought in the year of enquiry will form the basis of adjustments for other years without even reviewing these records.
The number of earlier years brought into any settlement will depend on the reason for the error identified. If the adjustment arose from a careless error, HMRC can include a maximum of 6 earlier years in the settlement but if the error was deliberate then HMRC are able to go back for 20 years.
Once concluded, a penalty can be charged for the submission of an incorrect return. The penalty received reflects the nature of the incorrect return, therefore, the penalty will be larger if you deliberately concealed income than if you made a mistake despite taking reasonable care.
Once a tax investigation has started, it can last several months or more. A tax investigation may also expand, for example, to a corporation tax investigation leading to enquiries into the directors’ personal tax affairs. Your accountant can advise you what to do if HMRC is asking for too much information, taking too long or otherwise behaving unreasonably.
It is also possible to get insurance to help cover the costs of fees incurred during an investigations. Good tax protection cover will also provide you with access to a legal and tax advice helpline whenever you need it – not just when problems arise.
It is important to understand, though, that insurance of this type also relies on you being a conscientious taxpayer. In order for your cover to be valid you must complete and submit the relevant returns properly, and on time. You should also understand that tax protection will not cover any underpaid tax, penalties, fines, or interest. Instead, it is there to help you deal with the costs of an investigation.
Kingston Burrowes are pleased to offers all its clients the option to purchase our Tax Fee Protection Service, in partnership with PfP Online, please ask for more details.