Have you ever tried calling through to HM Revenue & Customs? If yes, then you would be forgiven for thinking HMRC are too large an organisation to do anything quickly.
While HMRC may not be winning any awards for its speedy answering of calls anytime soon, it is most certainly proficient at investigating those they believe may not be paying the right amount of tax.
What triggers an investigation?
HMRC claims compliance checks are usually triggered when figures submitted on a return appear to be wrong in someway. If a small company suddenly makes a large claim for VAT, or a business with a large turnover declares a very small amount of tax, this will likely be flagged-up by HMRC.
However, there are some other things that experience has told us may make a business become the target of an investigation:
- HMRC receives a tip-off
- You work in a high-risk industry, for example one that routinely takes cash payments
- You have a large fall in income, increase in costs or there are inconsistencies between different returns
- You file your returns consistently late
- Your costs are above the industry norm
- Your tax returns are inconsistent with your standard of living
- You are in a sector that HMRC has decided to target.
Although, it is important to mention that investigations can be completely random.
What business taxes does HMRC investigate?
Many different types of business taxes can be investigated, it is not – as many seem to think – limited to income tax. Other areas of taxation that can be investigated are as follows:
- Insurance premium tax
- Landfill tax
- Capital gains tax
- Climate change levy
- Construction industry scheme
- Corporation tax
What types of investigation are there?
There are three different levels of HMRC enquiry; full, aspect and random.
During a full enquiry, HMRC concerns itself with cases where it believes there is a significant risk of error in the tax return. In this type of enquiry, a review of all records will be undertaken. This can include personal financial records of Directors/Business owners as well as business records.
If a business is subject to an aspect enquiry, then HMRC are concerned about a particular part (or parts) of your accounts and wants more detail. Generally, the outcome points to a genuine mistake or misunderstanding rather than deliberate attempts to evade tax. This type of enquiry shouldn’t be taken lightly, and should be treated just as seriously as a full investigation.
The third type of enquiry is purely random. HMRC simply picks a selection of businesses completely at random to investigate.
What happens once HMRC have decided to investigate?
Once HMRC have decided to conduct a tax investigation, you will be obligated to provide the information they require. Having said that, you can argue against the decision to investigate if you believe HMRC’s reasoning to be incorrect. The rest is in the hands of HMRC, they will look into exactly what caused the anomaly – more often than not is is due to nothing more than a minor discrepancy and the case is quickly closed.
Occasionally though, some cases will need a more detailed investigation and HMRC may request further information.
What are the possible outcomes?
What happens next depends on what HMRC finds. Some of the most common outcomes and solutions include:
In this instance, the taxpayer will receive a tax rebate with interest.
This outcome will result in the taxpayer being formally required to pay any tax owed within 30 days, possibly with interest added.
If HMRC conduct a tax investigation and conclude there was deliberate wrongdoing on the part of the taxpayer, then HMRC may escalate the case to criminal status.
If this happens, you may have to pay a penalty. The amount will depend on factors such as why you underpaid or over claimed tax, if you told HMRC about any mistakes as soon as possible, and if you were cooperative throughout the enquiry,
When does an investigation end?
The end of an investigation is officially marked by a decision notice or agreeing a contract settlement.
Decision notices are usually received in the form of a letter detailing exactly what the final position is, and can include a penalty notice or an assessment.
A contract settlement is a legally binding agreement between HMRC and the taxpayer, whereby the taxpayer agrees to pay the money and HMRC agrees not to use its powers to recover the money.
Once a return has been investigated, it cannot be investigated again.
Should you find yourself facing a tax investigation, you can contact us.