What triggers a tax investigation?

Since 2010, HM Revenue & Customs’ (HMRC) total revenue from tax has increased year-on-year and in 2016-17 reached £574.9bn[1], with £28.9bn of this generated as a result of compliance activities[2].

These figures demonstrate that HMRC has, in recent years, taken a much more steadfast approach to identifying non-compliance and pursuing those responsible, leaving no stone unturned.

It continues to invest large sums of money into its cutting-edge ‘Connect’ software which pinpoints anomalies in data, obtained from a range of sources, and directs HMRC towards people who may not be fulfilling their tax liabilities.

HMRC has been open about its intentions to pursue those who deliberately cheat the system and refuse to pay the sums that they owe, and its latest initiatives and plans to crackdown on tax avoidance and evasion are never far from the headlines.

From landlords and overseas investors, to the gig economy and SME’s and from trusts to online retailers; the truth is, no matter how big your business is, what sector you operate in or how long you’ve been in business, you are not immune.

Even if you have nothing to hide, there are several potential triggers that can raise HMRC’s suspicions and could leave you facing a tax investigation. Here, we identify some of these triggers and how you can reduce the risk of being HMRC’s next target:

1. Are you on time or always late?

If you consistently file your tax return late, HMRC will become suspicious. Being at the helm of a business is demanding and it can be all too easy to forget important dates and deadlines. However, submitting your return on time can save you a whole lot of stress in the long run.

2. Inconsistent cash flow

If HMRC notice sudden or sizeable changes to your reported income and outgoings, for example if your income plummets and your expenditure sky-rockets, alarm bells may begin to ring. The key here, is being able to explain why the fluctuations have occurred and to be able to provide evidence if necessary.

3. Is there something missing? 

Be sure that you’ve declared all your sources of income; regardless of whether it innocently slipped your mind, HMRC have the technology and will to dig deeper if it suspects you’ve deliberately omitted important information. With the rise in the use of social media, it’s worth noting that HMRC do also use these platforms to identify potential tax evasion. For example, if you share that you have just purchased a flashy new car, yet your tax return declares only minimal income, this could lead to an enquiry.

4. Be accurate, avoid errors

None of us are perfect and we all make mistakes but if they are making a regular appearance on your tax returns, HMRC will want to know why. Granted, tax returns can be complicated but you should be confident that your return is accurate and free of errors before you submit it.

5. Take responsibility for your records

Never underestimate the importance of keeping your records in order and up-to-date. If you can do this, you will undoubtedly find that the process of completing and submitting your tax return becomes quicker and easier. In addition, the information you do submit is less likely to contain errors.

6. Is HMRC targeting your sector?

Sometimes it can be as simple as your sector having been identified as HMRC’s next target. As we said at the start of this blog post, no business is immune and HMRC is watching; whether you rent property, provide legal advice, build offices or run a restaurant, you are at risk. Often, in these cases, there is nothing you can do but be prepared.

7. Conform to the norm

HMRC will likely compare your figures, to those reported by other businesses like yours. If you stand out as significantly over- or under-performing in relation to the industry average, this may prompt them to investigate further. Standing out from your competitors is typically a good thing but, when it comes to your figures, conforming to the norm might not be so bad. There may be a reason that you are under- or over-performing – just be prepared to explain this to HMRC.

8. No rhyme nor reason

In some cases, there may be no rhyme or reason for a tax investigation. Random selection is less common, but still possible all the same. The best thing you can do is make yourself less susceptible to an investigation by managing the other risks discussed in this post.

How can my accountant help?

Preparing and filing your tax return takes time; time that would be better spent on running your business. Not only this, but in the absence of expert knowledge and years of experience it is all too easy to make costly errors. Errors ultimately cause delays and will leave you feeling unnecessarily stressed.

You can easily avoid this by entrusting us with your annual tax return. Our trusted tax advisers will assist you with fulfilling your self-assessment obligations, whilst saving you time and money, helping you to grow your business and eliminating worry along the way.

As your accountant, we are also your best defence if you do find yourself subject to a tax investigation. Investigations can be disruptive, intrusive and expensive. This is why it’s imperative that you take expert advice and guidance when dealing with HMRC. We can:

• Translate the complexities of a tax investigation
• Manage dialogue with HMRC, acting as a barrier between you and the tax man
• Assist with the submission of documentation or information required by HMRC
• Minimise the impact of a tax investigation upon your personal and business life
• Aim to secure an outcome that satisfies both parties

We have years of experience when it comes to dealing with both personal and business tax enquiries and investigations, helping our clients to reach a satisfactory conclusion and leaving them with peace of mind when it comes to their tax affairs.

We also offer a Tax Investigation Fee Protection Service; you can find out more about the service and the protection it provides here. If you’d like to discuss your circumstances in more detail, contact us today.

[1], [2] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/628377/HMRC_Annual_Report_and_Accounts_2016-17__print_.pdf

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