What happens during a tax investigation?

As a business, facing a HMRC tax enquiry or investigation can seem daunting. In addition to the stress of the investigation itself, you are then required to execute the day to day running of your business as though everything is normal. HMRC simply wants to crack down on individuals and organisations that are paying less tax than they should be. Nevertheless, you can be the subject of an investigation even if you have nothing to hide.  

In this blog, we’ll guide you through everything that happens during a tax investigation.

Types of tax investigation 

There are two types of tax investigation that can be carried out by HMRC, each with differing levels of severity. These are: 

Aspect enquiry 

An investigation targeted at a specific area of the business’s accounts. For example, when there are inconsistencies in a section of a recent tax return. 

Full enquiry 

Here, a HMRC investigator will review all your business records. If you are a limited company, this will result in scrutiny of company directors’ tax affairs, along with the affairs the business itself. A full-scale investigation is typically initiated when HMRC believes there is significant risk of a tax error. 

It should be noted that both an aspect enquiry and a full enquiry can be initiated randomly. As the name suggests, in this case the investigation can affect any business at any time. Oftentimes, HMRC will not consider the nature of your accounts or if the business has triggered an alert before launching a random enquiry. 

What can trigger a tax investigation? 

While some checks are completely random, there can be a variety of legitimate reasons why HMRC would want to conduct a tax investigation. This includes: 

• Late filing of a tax return or tax payment. 
• Errors need to be corrected on a tax return. 
• The business is reporting expenses that are abnormally high for its industry. 
• HMRC has received a tip-off. 
• Tax returns are inconsistent. 
• The business is operating in a high-risk industry. 

Although many believe that tax investigations are exclusively concerned with business income tax. In reality, many different types of taxes can be the subject of an investigation, such as: 

• Capital gains tax 
• Insurance premium tax 
• Landfill tax 
• Climate change levy 
• Corporation tax  
• VAT 
• Construction industry scheme 

Process of a HMRC tax investigation 

As the national tax authority in the UK, HMRC has the right to check a business’s affair at any time. If your business is selected for a tax investigation, the first thing that will happen is you’ll receive an official communication from HMRC. This will be either a letter or a phone call to confirm the existence of the investigation, as well as what their focus is. 

During the course of the tax investigation, HMRC will then ask various questions to find out what they need to know. An investigator can go back up to 20 years in business records during a full enquiry. This is reduced to 6 years when carelessness in a certain area is suspected, and 4 years for random enquiries. Their actions will be tailored to the areas the investigation is targeting, which can include: 

• The company tax return. 
• Your Self Assessment tax return (if present). 
• Any PAYE records and returns. 
• Tax accounts and tax calculations. 

HMRC investigators can visit business premises to inspect assets, view computers, question staff, and remove records for examination. Depending on the severity of the investigation, the entire process can take anywhere from 3-6 months for a random check, to 18 months for a full tax investigation. 

If you use an accounting service for statutory accounts or management accounts, HMRC could make first contact with this party instead. If this is the case, your accountant should inform you of the investigation immediately. 

Outcomes 

Once HMRC are satisfied they’ve found what they need, the end of the investigation will be marked by a decision notice or the agreement of a contract settlement. The former outlines HMRC’s final assessment and will include any penalties. Decision notices are typically issued in the form of a letter. 

On the other hand, a contract settlement is a legal agreement between the taxpayer and HMRC. In it, you must agree to pay any tax owed along with any penalties set out. As part of the contract, HMRC agrees not to forcibly recover the money by using its powers. 

Get tax investigation insurance 

The best way to protect your business against a tax investigation is to make sure your accounts are in order. For this, you need expert bookkeeping and accounting services such as those provided by Jan McDermott. Being investigated by HMRC can be a time-consuming and costly process. We offer tax investigation insurance as a solution, so you’re protected from any costs incurred during a HMRC investigation. Contact us today to get started.