Facing an investigation by HM Revenue & Customs (HMRC) can be a daunting and disrupting experience for individuals and business owners. Understanding what triggers an HMRC tax investigation and the procedure that follows can help mitigate the impact and ensure it goes as smoothly as possible.
Tax investigations range from ‘Small Aspect’ to ‘Full Enquiry’. HMRC gathers documents like business accounts, scrutinises tax calculations and may conduct interviews to assess tax compliance. The taxpayer must cooperate and has a right to seek advice from an accountant or tax advisor.
In this blog post, we will look at what triggers an HMRC tax inspection, what happens next and how best to navigate the process. For advice on a tax investigation or your broader tax affairs, please get in touch with the tax experts at Spotlight Accounting.
What is an HMRC tax investigation?
An HMRC tax investigation is an enquiry into the tax affairs of an individual or business. The purpose is to ensure that an individual or business is compliant with the UK tax system, identify any irregularities and recoup underpaid tax.
Why does HMRC investigate business tax affairs?
Several scenarios trigger HMRC tax inspections, including:
Random checks – HMRC conducts routine tax audits each year, so you may find yourself subject to an investigation even if your tax affairs are accurate and up-to-date.
Information for third parties – HMRC may receive information from whistleblowers or statutory third parties such as the Land Registry, the Students Loans Office and the Child Benefit Office. They may also receive information about offshore bank accounts from overseas tax authorities that prompts an investigation.
High-risk industry – HMRC considers certain industries at significant risk of deliberate tax evasion, e.g. those where there is a high volume of cash payments. It may choose to target companies in those industries based on data analysis.
Discrepancies in returns – Inconsistencies and errors found in a Corporation Tax or Self-Assessment tax return can trigger an investigation.
Unusual transactions or patterns – Using data analysis, HMRC can identify inconsistencies in income across tax years, plus income that is outside industry norms, prompting them to investigate.
Business association – If your business is connected to another business with a history of tax avoidance, this can trigger an HMRC tax inspection.
Late submission – Submitting tax returns after the deadline may raise red flags for HMRC. A professional accountant like Spotlight can ensure that your tax return is submitted accurately and on time to avoid an unnecessary interest in your tax affairs.
Types of HMRC investigations
There are several different types of HMRC investigations, some more in-depth than others. Let’s take a look at them in turn.
Random
HMRC carries out random, routine checks, often for no specific reason. These inspections involve reviewing Corporation Tax and Self-Assessment tax returns, the business’s financial records and other documentation to confirm compliance.
Aspect Enquiry
As the name suggests, an Aspect Enquiry focuses on a particular aspect of a tax return. For example, an individual may have failed to declare student loans or capital gains in their Self-Assessment tax return. HMRC can open a Full Enquiry if discrepancies are found during the Aspect Enquiry.
Full Enquiry
This is a full investigation into every aspect of an individual’s or company’s tax affairs and can be triggered by suspicion of tax evasion or non-compliance.
A full enquiry is thorough and involves an extremely in-depth tax audit. HMRC will scrutinise business accounts and tax calculations, as well as interview directors about the company tax return.
The process requires full cooperation and the subject will be asked to submit extensive documentation to be submitted, such as expense receipts.
VAT
This type of investigation is carried out on VAT-registered businesses that HMRC suspects of VAT fraud, such as not submitting accurate returns. HMRC may also investigate those businesses that may be liable for VAT but have failed to register.
During the investigation, officers will look at business records, transactions, and VAT returns to ensure compliance with VAT regulations.
To learn about registering for VAT, check out our blog.
Employer compliance review
These enquiries are directed at PAYE (Pay As You Earn) employers to ensure they are adhering to statutory obligations and calculating accurate Income Tax and National Insurance Contributions on behalf of their employees.
During these investigations, HMRC looks at payroll, PAYE records, employment contracts and other relevant documentation.
What are the stages of an HMRC investigation?
The HMRC investigation process involves 5 main stages:
- Notification
The tax investigation begins with formal notification by letter. The letter will detail the scope of the tax investigation, the specific information or documents required and a deadline to supply the documents. At this point, the tax inspector can request to visit you at your business address or your accountant’s office if you choose. - Gathering information
HMRC will collate the information needed to assess your tax position and complete the tax audit. During this stage, inspectors may review tax records and supporting documentation and analyse transactions. They may also interview company directors and/or accountants. - Communication
The tax inspector will communicate with you and your tax agent/accountant throughout the process to gain further insights, request information and provide regular progress updates. - Assessment
The tax inspector will assess your tax liabilities for discrepancies and errors. If they discover any owed tax (or overpaid tax), HMRC will propose the relevant adjustments and calculate any interest or penalties owed. - Resolution
Once the tax investigation is complete, a letter is issued summarising HMRC’s findings and detailing the necessary course of action. This could include a penalty notice. If the taxpayer agrees to this contract settlement, the inspection will close. - Dispute
If you disagree with the outcome of the tax investigation, you have the right to appeal through the appropriate channels. It is very wise to involve an accountant or tax specialist at this point if you haven’t done so already.
If HMRC decides to investigate your company, it demands your full cooperation. There will be some disruption, but supplying timely, accurate information and answering queries promptly will help smooth the process.
You have the right to seek professional advice from a tax advisor or an accountant who is experienced in dealing with tax inspections and will often handle it on your behalf.
What taxes do HMRC look at during an investigation?
HMRC tax investigations cover all types of individual and business taxes, including VAT, Corporation Tax, PAYE, National Insurance, Income Tax, Capital Gains Tax, Student Loan deductions and higher income child benefit charges.
Is a tax inspection a criminal investigation?
Most cases of non-compliance are breaches of civil law, such as administrative errors, late filing, inaccuracies in tax returns, failure to maintain proper records, or underpayment of taxes due to negligence. Therefore, HMRC deals with them as civil investigations and can impose penalties or fines.
If HMRC suspects a serious case of fraud, such as persistent tax evasion, concealment, corruption or money laundering, they can carry out a criminal investigation.
What should you do if you believe you are not committing tax fraud?
If HMRC is investigating you or your business, you must cooperate with them fully and supply the requested information, even if you are convinced of your compliance. It’s easy to panic, but remember, they may not be investigating you based on suspicion, it may be a random check.
As seasoned tax specialists, we advise our clients to answer questions and provide documentation efficiently. If you have fulfilled your tax obligations, your cooperation will help conclude the investigation as quickly as possible.
Spotlight Accounting can handle a tax inspection on your behalf
A tax investigation can be time-consuming, distracting and stressful. That’s why, when HMRC come knocking, many businesses and individuals seek help from a professional chartered accountant.
The team at Spotlight Accounting are highly experienced in dealing with all types of tax investigations. For our regular clients, we offer a tax protection service, which covers time spent handling tax investigations, minimising disruption and anxiety. We can also deal with one-off tax investigations for new clients.
Your dedicated accountant will be the main point of contact for HMRC, and gather, collate and submit the required documentation. They will keep you updated throughout the process and be on hand to answer your questions.
If you would like to know more or speak with one of our tax experts, please get in touch.
