Tax Investigation - Your Complete Guide 2024

Tax Investigation – Your Complete Guide 2021

expert guide to tax investigations

Established by the Act of Parliament in 2005 as a new department replacing the earlier Inland Revenue and Customs and Excise (IRCE), HM Revenue & Customs (HMRC) is the UK’s tax, payments, and customs authority. Simply put, it’s the tax authority of the UK government.

Its primary responsibility consists of examining your affairs at random to ensure you’re paying the right amount of tax without discrepancy(s). Thus, the idea of HMRC tax investigation is enough to fill even the careful and financially credible business owner with a sense of suspicion.

Since HMRC could end up combining all your facts and figures, it makes you suspect the tax returns you filed, the invoice(s) you recorded, and the expense(s) you claimed. The tax investigation procedure, of course, is dreadful as every discrepancy invites tax penalties. However, if you’d go through this complete tax investigation guide, you’d be better prepared for one if the same knocks on your door the next time.

What Is A Tax Investigation?

In layman’s terms, a tax investigation is a financial audit conducted by HMRC. If you’d be on their radar, they are more likely to notify you regarding the same either through telephone or email. They’ll also inform you about precisely what kind of information they want to check by this investigation.

Thus, you’d then need to present the required documents and business records to the investigation team.

Being the publicly-owned department of the UK government, HMRC holds the legal right to audit your finances any time they want with prior notification.

Hence, there is no chance to decline their request. Besides other documents (I’ll come to this later), you might be asked to provide them with things like your VAT information, PAYE (Pay As You Earn) payment evidence, details of your IT returns, your Self Assessment tax return for a given year, among others.

What To Expect During An HMRC Tax Investigation?

As you’d come to know, there are different kinds of tax investigations HMRC could initiate against you. Depending upon its type, they will request additional documents and other details.

The following are the three types of tax investigation procedures you can expect.

  • Full Enquiry: As its name suggests, a full enquiry involves a thorough examination of your business’s tax affairs. What makes HMRC go for a full enquiry against you is their doubt of a significant risk of errors in your tax. Note that full enquiry also involves the company’s directors.
  • Aspect Enquiry: In the case of an aspect enquiry, the financial auditing team will assess a particular aspect of your tax. In the majority of cases, it’s your income tax details.
  • Random Check: Random check, as its name suggests, can take place any time of the year. It doesn’t depend upon the state of your accounts or whether HMRC got triggered by anything unfair regarding your tax affairs or not.

Once the team collects all the necessary documents to start their investigation, they’ll check your accounts in line with other aspects of spending, as well as asking you questions about your finances. This can happen either in-person or virtually.

The entire HMRC probe is a complicated process. For the business owners under the HMRC lens, the biggest problem originates from several stress factors. However, cooperating well with the investigation officers and presenting them all the up-to-date documents asked for is all you’ve to do from your side. This will ensure that your tax investigation goes smoothly and hassle-free.

How Long Does A Tax Investigation Take?

The answer to “how long does a tax investigation take” isn’t fixed. The duration of any tax-related investigation depends upon several factors such as:

  • The severity of the problems found,
  • Type of enquiry (full, aspect, or random),
  • How well you keep records, and
  • The size of your business.

For a quick idea for the above, a tax investigation of a small business with sound accounting and up-to-date business records, the duration is around three months or less. On the contrary, for a full-fledged business with records of tax fraud(s), HMRC could continue its investigation for at least a couple of years.

Hence, there is no fixed answer to how long you can expect a tax investigation to last.

How To Prepare For HMRC Tax Investigation?

Whether you’re guilty of tax evasion or not, it’s always better to prepare yourself for the HMRC tax investigation. Since such audits are conducted thoroughly by professionals, there are no chances for anyone to escape.

The most common preparation strategies include getting yourself legal counsel. Depending upon your case, you may need to prepare differently than others.

Be it any case, preparation for a tax investigation serves the following purposes.

  • It eases personal anxiety.
  • It prevents stress from overpowering you.
  • Even some essential preparation can make the entire process go smoother and faster.

Last but not least, preparation ensures you miss nothing when the officer asks for anything such as any document, record, etc.

A Quick Tax Investigation Preparation Guide

If it’s your first time meeting the tax investigation officers, the following tips will come in handy.

Be Proactive Rather Than Reactive

Staying proactive rather than reactive keeps you in a strong position at the time of investigation, whether you’re guilty or not. I mean to say by this is that act smartly and be ready with – proper tax planning, understanding of your tax liability, and accurate and up-to-date books.

Collect All The Resources To Prove/Support Your Points

Every type of tax investigation will require you to prepare all the documents the auditors would most probably ask for. These include copies of invoices, receipts, transaction records/reports, and any other data you have.

Seek Professional Help At Every Step

Tax investigation isn’t the time to show your smartness by handling everything on your own. It’s time you’d seek professional help. You might be or might not be able to handle the HMRC investigation by yourself. Hence, to be on the safer side, it’s better to look for professional accounting services.

They will ensure that you face the investigation officers with all documents and smoothen the entire process.

Conduct An Internal Audit Of Your Accounts

Though it must be done regularly, its importance gets a notch higher at the time of your tax investigation. An internal audit will identify and rectify any possible problem(s) before HMRC catches them.

In case any issue is uncovered during your audit, reporting it early to the HMRC indicates transparency. This also protects you from small mistakes bound to happen.

You can conduct the audit of your accounts either by your in-house accountant or hire any professional Xero or QuickBooks accountant.

So, these are a few expert tips to help you prepare for the tax investigation.

If You Don’t Have The Required Information HMRC Needs, Then…

It would be best if you didn’t worry at all. In today’s digital age, when everything is stored online or accessed online in a breeze, you shouldn’t worry even for a second.

In the bizarre cases when even online documentation isn’t accessible, you’d proactively explain everything to HMRC. This way, both of you can reach a realistic solution instead of panicking.

For example, suppose you claimed for a computer purchased a couple of years ago for which you paid via cash. Now, if you can’t show up with its receipt, there isn’t anything to worry about. Though you don’t have proof of spending, the computer is your proof of purchase.

Therefore, the auditors will work with you to conclude a fair and reasonable outcome even though you don’t possess the receipt.

Can I Avoid The HMRC Tax Investigation?

You should know that HMRC doesn’t send you its investigation notice only when it develops doubt over your business’s financial operations but also to ensure everything is going fine. Due to this, the selection process of HMRC is often random to review the financial landscape of businesses running in the UK and their accountancy practices.

Coming back to the query, no one can avoid the tax investigation initiated by HMRC under any circumstances. You should be prepared for the same, for which I’d recommend partnering with professional accounting services as provided by the CloudCo Accountancy Group.

We comprise a talented pool of experienced accountants and bookkeepers who specialise in delivering both on-site and off-site solutions to SMEs and large enterprises alike.

You can contact us via email at [email protected], phone 01908 041755 or by completing our website contact form here.

CloudCo Accountancy Group

CloudCo Group is a Chartered Management Accountancy Firm offering premium accounting services to a range of businesses and individuals from their office in Milton Keynes.

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