HMRC Tax Investigation? Don’t Panic, Here’s What to Do

From time to time, companies and individuals will face a routine tax audit, but a more serious tax investigation can take place if HMRC suspect that your tax returns are not accurate or that something looks out of the ordinary. Undergoing a tax investigation can be a complex and very stressful affair, so it’s best to involve your accountants as soon as you’ve been informed about the investigation.

How likely is it that my company will be tax audited or investigated?

If you’re registered for VAT, or have employees who are subject to PAYE deductions, you can expect the odd routine tax audit or investigation. In this case, HMRC will normally check your company records and systems and concentrate on those areas where errors most often occur. When it comes to Income Tax or Corporation Tax, routine tax audits are very unlikely.

HMRC tend to investigate tax issues only if they believe you’ve made numerous mistakes or are deliberately trying to avoid paying tax. On average, a tax audit will happen every 5 years or so, but an in-depth tax investigation can happen at any time, if HMRC suspect that tax is being underpaid.

Tax audits or investigations are more likely to happen if: 

• there are variations or inconsistencies like a dramatic increase in costs or a large fall in turnover
• tax returns are filed late, you pay tax late, or you make errors in your tax calculations
• costs appear to be excessively high for a company in your industry
• your company operates in a high-risk industry and routinely accepts cash payments
• you or your  company operates offshore bank accounts
• your company receives income from property
• HMRC receives a tip-off

There are insurance policies you can take out to cover you against the costs of a tax audit investigation. Speak to your accountant about this.

How am I notified of a tax audit or a tax investigation?

HMRC will contact you if they feel the need to conduct a tax audit or an investigation. In the case of an audit, they will normally come to your offices to check your tax records. In the case of a tax investigation, you’ll first receive a letter from HMRC requesting information.

Their letter will specify if they’re going to investigate a particular aspect of your tax return, or whether a full tax investigation is to be carried out. Contact your accountants immediately, as they should be able to tell you the reasons for a tax investigation. By law, HMRC must commence their investigation within 12 months of the due date for the tax return it relates to, or 12 months after you filed the return, if you missed the due date.

What to do during a tax audit or tax investigation

 Your accountants should go through your records and systems very carefully, so that you can provide accurate, up-to-date information as quickly and easily as possible when the tax inspector visits.

In the case of a tax investigation, it’s worth seeking specialist advice so that you know how to respond to requests from HMRC for further information and documentation. You’ll find it beneficial to create your company audit checklist to keep track of what’s been requested and provided. It’s also a good idea, wherever possible, to deal with HMRC through your accountant, in writing, rather than having phone conversations or unaccompanied meetings directly with the tax inspector.

Whatever you do, do not mislead, or lie, or destroy evidence, as this will only lead to harsher penalties. If you can, make payments on account towards any likely tax bill, so that you reduce the amount of interest that will become payable.

Once a tax investigation has started it can last several months or more. The investigation could also expand if, for example, a corporation tax investigation leads to enquiries into the directors’ personal tax affairs.

Depending on the severity of the matter, forensic accounting services may be needed to determine the extent of any financial or tax inconsistencies.

Your accountants should be involved every step of the way so they can advise you what to do if HMRC takes too long, requests too much information, or behaves in an unreasonable manner.

Walls have ears

Tempting though it might be to tell your friends at the golf club or in the pub that you’re being investigated, you don’t want everyone in the village to know the details of your case – and you never know this may include someone who works for HMRC!

Be prepared

Remember the motto ‘No one prepares to fail, they fail to prepare’. In order to answer the tax inspector’s questions, you must be well prepared. If not, your lack of preparation may be seen by the tax inspector as a lack of co-operation on your part.