By Ashley Preen

December 27, 2020

What You Need to Know about HMRC Tax Investigations

Unfortunately, tax investigations by HMRC are far more common than people might expect. In 2010, HMRC installed a new AI and data-mining tool called Connect, which was designed specifically to combat tax evasion and fraud.

Unfortunately, this can sometimes lead to “false positives”, which is when an innocent person is caught in the net of investigation.

Here are some things to know about HMRC’s Dragnet!

Before Investigation — Insurance!

Okay, we know that this might come across sounding a little like “I told you so!” but if you haven’t been picked out for investigation by HMRC yet then please, please, pretty-please sign up for Tax Investigation Cover right away!

Even if you are completely exonerated from any wrongdoing, HMRC tax investigation can go on for years, utterly ruining a business which is not prepared for them.

Although you might recoup all court and legal fees in any ensuing victory, the victory might be a pyrrhic one due to all the strain and costs that accrued during the battle. Many companies just don’t have the cash flow to cope with a particularly aggressive enquiry.

Proper tax investigation cover will take care of all of the above for you — everything from accounting fees to legal fees and, depending on the insurance you select, sometimes even actual legal representation.

The crux, however, is to be covered before receiving a letter from HMRC informing you of the fact that you are under investigation.

If you are indeed covered, your accountants and/or legal representatives will advise you on what you need to give them so they can take the matter up directly with HMRC.

The three types of investigations

An HMRC tax investigation falls into one of three categories:

1. Random Check

These can occur at any point. There is neither rhyme nor reason to them. A random check is exactly what it sounds like — no trigger required to fire the gun. It goes off by itself!

2. Aspect Inquiry

If only one particular aspect of your business and taxes has triggered an alert, then HMRC might investigate this specifically. For example, they might look into your compliance with VAT, a recent Company Tax Return, PAYE, etc.

3. Full enquiry

Also known as “the doozie” (we just made that up), a Full Enquiry is the dreadnought of HMRC’s investigations.

If you are selected out for a full enquiry, the first and foremost thing to do is: Don’t panic.

The second thing is to call your accountant.

If you don’t have an account, hire one immediately!

You might have gone it alone with HMRC up to now. But if you are under investigation, it is highly recommended that you work with a pro to assist you through the upcoming rigours.

What happens next?

Your accounts will be audited thoroughly by HMRC. If you have had a competent accountant working on your accounts, this might be faster than expected.

You will be questioned (dare we say, interrogated?) thoroughly about your accounts.

Let’s be blunt: It’s not pleasant.

But if you’re calm, courteous and have nothing to hide, it will soon pass. Being cooperative is the only way to guarantee a speedy-as-possible resolution.

How to avoid an investigation

Ah, yes, the billion-pound question.

It’s not possible to entirely guarantee avoiding an investigation, but it is indeed possible to minimise the risks of one.

First and foremost, you must absolutely make sure that your tax returns are always 100 per cent correct. Regular errors or corrections on the returns are a sure signal to HMRC that something might not be entirely legit with your books.

If your returns are often late, that might also trigger HMRC to look deeper.

Did we mention that having an accountant can prevent many of these errors? Yes, we did. (Because it’s true…)

What to do when you’re investigated

After calling your accountant, reconcile your bank accounts. Make sure that your accounting software is up to date with your banking.

Ensure that all your filing is up to date and that you have copies of all the invoices you sent out.

Similarly, ensure you have copies (or originals) of all receipts for business expenditures.

Then, wait for feedback from HMRC.

The end result

After the audit and findings, your tax investigation will either end or be escalated.

And, think on the bright side, it could also happen that HMRC discovers that you paid too much tax! In that case, you’ll get a rebate. (It’s a pity you can’t get more than that for your stress…)

Alternatively, HMRC discovers that you actually owed more tax but that no willful wrongdoing was involved. Count your blessings, in that case. It happens to the best of us. Our advice is to cough up and shut up!

The third result is the one no one wants: Deliberate wrongdoing. That one goes to court.

Your best way through that is to hire a top-notch lawyer and accountant.