If you’re an individual or business in the UK, it’s important to be aware of the things that can trigger an HMRC investigation. The thought of being audited by HMRC can be stressful for even the most responsible and compliant taxpayers. Although HMRC investigations are a rare occurrence for most taxpaying individuals and businesses in the UK, however, it’s essential to be proactive and monitor your business or personal affairs throughout the year to ensure that you remain compliant in the eyes of the HMRC at all times.
There are various types of things that can lead to an investigation from HM Revenue & Customs (HMRC). Make sure to hire a professional tax advisor and accountant consultation services to avoid paying fines and avoid the stress of a tax audit. Here’s what you need to know about the HMRC investigation:
What is an HMRC Investigation?
An HMRC investigation is a review of a business or individual’s tax returns or finances by a government organisation like HM Revenue & Customs to determine whether or not the person or business is being compliant with tax laws within the UK. It can take the form of an audit where the taxpayer will be visited by HMRC agents at their home or business to conduct an investigation. The agents will review financial records, receipts, and other documents to determine whether or not the business or individual has been complying with the relevant tax laws and regulations.
Once the audit is complete, the HMRC agent will issue a tax liability assessment if any discrepancies are found on their records. If the taxpayer fails to pay the tax liability assessment when it is issued, then HMRC can take legal action against them to recover the outstanding amount owed.
Types of Investigation
Aspect Investigation
In an aspect investigation, the HMRC generally investigates a certain aspect of tax or business compliance, such as VAT issues or self-assessment returns. They request selected documents and records relating to those issues and request any clarifications relating to the issues specified.
Full Investigation
A full investigation tends to be more serious and involves examining a wider range of transactions and other documents. This is typically reserved for cases when irregularities have been detected or when there has been a suspicion of fraud or other criminal activity.
What Triggers the Investigation?
Late Filings
The most common reason for an HMRC investigation is that your business has not filed its tax returns on time for that year. Under UK tax law, all businesses and individuals are required to file their annual tax return with HMRC on or before the relevant deadline date each year.
Failure to file your tax return within the required timeframe will result in an automatic penalty from the HMRC, which may be hundreds or even thousands of pounds in unpaid taxes. To avoid this situation, you should ensure that you submit your annual tax return as early as possible before the deadline date. Hire a professional tax advisor to ensure that the return is filed on time and to avoid future penalties.
Receiving A Tip-off
Another common trigger for an HMRC investigation is an allegation that your company has been engaged in illegal activities such as tax evasion or money laundering. If this happens, you will usually receive a letter from HMRC informing you of the allegations and requesting that you provide them with all the supporting documentation they need.
If you can provide the necessary documentation promptly, the investigation will usually be resolved quickly without needing further action. However, if you fail to respond to the request for information or provide any supporting documentation, the HMRC will continue their investigation and will likely impose a sizable penalty on you for compliance failure.
Company Costs are More than Expected
Another potential reason for an HMRC investigation is that the company’s profits appear to be significantly higher than the national average when compared with previous years. Although this by itself is not necessarily grounds for an investigation, it is more likely to be flagged up by HMRC if the company’s profitability is consistently low compared to other similar businesses in the area.
When a company reports significantly higher profits than the previous year but fails to explain why the increase has taken place, this could be an indication that the company is engaged in fraudulent activity. An investigation into this matter is likely to involve a close look at the financial records of the company to ascertain whether or not the money has been obtained legitimately.
Inconsistencies in Accounts and Payroll Records
If discrepancies are found in your company’s accounts or payroll records consistently, HMRC will investigate to see whether there is evidence of a fraudulent scheme being operated. It is an offence for an individual or company to falsify or alter their financial records without approval from the appropriate authorities. Any inaccuracies found should be reported immediately so that the issue can be resolved as quickly as possible.
Having a tax specialist on hand to help you with your finances will ensure that your accounts are always kept up-to-date and that any information submitted is complete and accurate, thereby minimising the risk of any errors.
High-Risk Industry
The industries investigated the most by HMRC include those in the construction sector, recruitment agencies, medical suppliers, and providers of payday loans. This is because these companies tend to operate in a highly-competitive environment with large amounts of cash changing hands regularly. A minor inconsistency or failure to report information on time can trigger a full investigation if the HMRC suspects that the discrepancy is indicative of a much larger problem within the business.
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About the Author
The author of this blog is Michelle Archer, a fully qualified accountant who has worked in the industry for over 20 years. She currently works as a senior manager at a CA firm in London and specialises in helping individuals and small businesses with their finances.
