No business owner or individual wants to face the daunting prospect of an HMRC investigation. However, investigations can happen, and it is essential to be prepared. If you or your business are selected for an inquiry, knowing how to approach it professionally and efficiently can make a significant difference. This guide will walk you through the process, helping you understand the steps to take when facing an HMRC investigation.
Understanding why HMRC opens investigations
HMRC investigations can be triggered for a variety of reasons. Typically, the tax authority selects cases based on risk, which might include discrepancies in submitted returns, large or unusual deductions, or failure to submit information on time. Random selection is also a possibility, as HMRC conducts regular checks to ensure compliance across businesses of all sizes.
For businesses, industries where cash transactions are common — such as hospitality — may attract more scrutiny. Meanwhile, individuals with complex tax affairs, such as landlords or self-employed professionals, may also be subject to inquiries.
Being aware of these factors can help reduce the likelihood of an investigation, but it’s important to remember that compliance is always key.
Step 1: Don’t panic and seek professional advice
If HMRC opens an investigation into your tax affairs, it’s crucial not to panic. While it may feel overwhelming, many investigations are resolved with little to no financial penalty, especially if you have kept thorough records.
At the outset of an investigation, it’s wise to seek advice from a tax professional. We can help you review the correspondence from HMRC, explain what the investigation entails, and represent you in communication with HMRC if necessary. This not only provides peace of mind but can also help ensure that the investigation progresses smoothly.
Step 2: Gather and organise your records
One of the primary reasons investigations are prolonged is due to disorganised or incomplete records. As soon as you are notified of an investigation, it’s important to gather all relevant documentation. This may include:
- bank statements
- receipts
- invoices
- payroll records
- VAT returns.
Keeping your financial records up to date and in order is vital, and the investigation will often focus on specific periods or transactions. If you have used accounting software, this process may be more streamlined, but make sure that all records align with the submissions you’ve made to HMRC.
If you discover any errors during this process, consult with a tax professional before presenting any information to HMRC. Voluntary disclosures, especially if the mistakes were unintentional, may help reduce penalties.
Step 3: Cooperate fully with HMRC
During an investigation, cooperation is essential. HMRC will often ask for specific documents and information within set timeframes. Failing to respond in a timely manner can lead to additional scrutiny or penalties. Respond to all requests professionally and accurately, and ensure you are clear on deadlines.
A proactive approach is recommended – if there are any delays or issues, communicate these as soon as possible. Collaborating with HMRC can help speed up the investigation and reduce the risk of financial penalties.
Step 4: Be prepared for all possible outcomes
An investigation can have various outcomes depending on what HMRC finds. If your records are accurate, and no underpayment of tax has occurred, the investigation will probably conclude without any penalties. However, if HMRC identifies discrepancies, there could be financial consequences. These might include:
- additional tax owed
- interest on unpaid tax
- penalties, which could range from 0% to 100% of the tax due, depending on the severity of the error.
Penalties are often based on the nature of the discrepancy – whether it was due to carelessness, an honest mistake or deliberate evasion. By cooperating fully and disclosing any issues upfront, you may be able to reduce the level of penalty applied.
Step 5: Appeal, if necessary
If you disagree with the outcome of an HMRC investigation, you have the right to appeal. This might be necessary if HMRC has made a mistake in its assessment, or if you believe the penalty is disproportionate. Appeals can be made to HMRC, and if this does not result in a satisfactory outcome, further appeals can be taken to an independent tribunal.
It’s important to handle the appeal process with care and ensure that you have the necessary documentation to support your case. Once again, professional advice can be invaluable at this stage to ensure that your appeal is properly presented.
Avoiding future investigations
While you may not always avoid being selected for investigation, there are steps you can take to minimise the risk.
- Ensure timely submissions: Make sure all tax returns and other required filings are submitted on time.
- Accurate record-keeping: Maintain thorough, well-organised records for all transactions.
- Use accounting software: Digital tools can help reduce human error and provide a clear audit trail.
- Consult professionals: Work with a qualified accountant to ensure compliance with tax regulations.
As a trusted accountancy firm, we can support you in maintaining compliance and reducing the likelihood of an investigation. Our experience helps you manage your tax affairs efficiently, giving you peace of mind and reducing risk.
Looking back, moving forward
Facing an HMRC investigation can be stressful, but with the right preparation and support, it can be managed effectively. By staying organised, cooperating fully with HMRC and seeking professional advice, you can navigate the process with confidence. If you find yourself under investigation, get in touch with us for expert guidance.
If you are worrying about how to handle an HMRC investigation, don’t fret. Thomas Barrie is here to help. Talk to us today.