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HMRC Investigations: Steer Clear of a Taxing Situation

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20 March 2019

HMRC Investigations: Steer Clear of a Taxing Situation

By Shona Duncan, senior tax manager

A tax investigation is costly, time-consuming and, if you’ll pardon the pun, taxing. HMRC investigations can review activity for a period as long as six years.

And, if the investigators determine that the original reason for their enquiry is found to be an intentional error, HMRC can even delve event further bank into your historical accounts.

What’s particularly frustrating about an HMRC inspection is having to account for the investigation yourself; that feeling that you’re facing up to something alone and that it’s going to take all your time, attention and resources.

Unfortunately, you can never fully eliminate the threat of being called for an inspection. There are times when HMRC is compelled to conduct a random audit. Although HMRC is not especially forthcoming about the precise criteria leading to an inspection, there are certainly measures you can take to reduce the chances of being inspected.

Keeping Accurate Tax Records

First and foremost, it’s essential to ensure all your tax records are accurate, especially your VAT supplies and services information if this applies to you. Keeping all these records in place will minimise the possibility of making regular errors on your returns. Submission of incorrect figures puts a red flag next to your tax records, leading investigators to question the credibility of the mistakes made.

However, one-off mistakes are not enough to motivate HMRC to carry out an inspection. The taxman knows that not all taxpayers are tax professionals. It’s the frequent year after year errors that arouse suspicion.

Consistent Earnings

HMRC has access to its own database where individuals’ income is matched to their profession or trade. This allows the taxman to estimate what your annual earnings are likely to amount to depending on your business activity. Declaring income which does not correspond to their data algorithms might ring alarm bells for HMRC.

Similarly, fluctuating numbers is not a good sign either. It’s very rare for a business to submit the exact same figures every year but equally, it’s also very rare for a business to declare drastic changes in earnings. Submitting varying figures will leave HMRC with two possible explanations: you earned less than the previous years or you did not declare your earnings accurately.

Whether this was a deliberate act or not will not influence HMRC’s decision to investigate, and the chances are you would be subject to a tax inspection. If your business has undergone a change which resulted in less income compared to the previous years, simply explain the situation to HMRC. It always helps to provide a bit of context and justification behind a discrepancy in income.

Considering a representation

Notwithstanding the criteria above, HMRC has the power to perform an investigation if it deems necessary, despite having all your records in check and you do not have fluctuations in your numbers.

In the same way, having an accountant managing your tax account is not a guaranteed investigation-proof measure.

Working with clients across a variety of industries, we have handled several cases in relation to tax inspections. Our approach is highly meticulous in such scenarios. As accountants, we help clients through a careful analysis of the situation in order to report back to HMRC as accurately as possible. Every case is different, but our goal towards client integrity and individual advice remains the same.  

Please contact Shona Duncan by email or call 01224 647394 where we can discuss this matter further with you.

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