What to expect from a tax investigation

After a temporary pause in April to free up resources for the coronavirus business response, HMRC has been getting its tax investigations up and running again.

That might not come as good news if you're in the midst of adapting your business to the gradually easing lockdown rules, or preparing yourself financially for the continued economic instability ahead.

Many business owners worry about the additional pressure that comes with a tax investigation, especially when they're already busy dealing with other aspects of their business.

But the more you know about the process, the easier it will be to deal with. In most cases, being prepared and having the right information to hand will help to resolve the investigation as quickly and smoothly as possible.

If your tax affairs come under HMRC's scrutiny, here's what you need to know.

The investigation process

Before the investigation begins, HMRC will contact you by post or over the phone, or they'll get in touch with us as your accountant.

They'll explain what they want to look into, and may request that you provide records for them to refer to. At this stage, we can explain what you need to do and answer any questions you might have.

There are three main types of tax investigation: random, aspect and full.

Random checks can be carried out on any business, at any time.

Aspect enquiries, meanwhile, are launched to look at a particular part of your accounts where HMRC suspects an error.

Full enquiries take a broader look at your accounts, usually because there's evidence of significant error.

While the investigation takes place, HMRC may ask to conduct a meeting in person. We recommend that we accompany you at this meeting, or hold it at our offices.

Depending on the type of tax being investigated, and whether or not HMRC believes the error to be deliberate, there are different limits on how far back into your records an enquiry can go.

For innocent errors, it might look at records covering the past four years. If HMRC believes you have deliberately evaded tax, the investigation can go up to 20 years back.

What should you do during an investigation?

Tax investigations can be stressful, but the best thing you can do throughout is to cooperate with HMRC, and provide any information they're looking for as promptly as possible.

Doing this will keep the investigation moving along as swiftly as possible, as well as reducing the risk that you'll be charged large penalties.

HMRC's penalty system takes taxpayer behaviour into account, including whether or not an error was deliberate, whether or not you notify them that you've made an error, and how long it took you to do so.

It's best to let HMRC know right away if you realise you've made a mistake, to avoid expensive fines, or even more serious consequences such as prosecution.

If you have deliberately committed tax fraud, you may be offered an opportunity to admit to it through the contractual disclosure facility, which offers immunity from legal proceedings in exchange for a full disclosure.

Whatever your situation, we can advise you throughout the investigation, and communicate with HMRC on your behalf. If you're worried about any aspect of your accounts, we're happy to talk it through.

Talk to us about HMRC investigations.