Here’s how to prepare your business for a tax investigation.
We know that a visit from HMRC as part of a tax investigation can feel like a really daunting time. Whether you’ve had issues with your accountant or you’ve been selected for a random spot check, the whole process can feel like an ordeal. In this article, we want to help business owners to feel more comfortable with the process, and understand how to get themselves prepared for the investigation. As bookkeepers ourselves, we work hard to keep our client’s financial records up to date, but if you don’t have this kind of support yet, here’s our advice.
Understanding HMRC tax investigations
First, it’s important to understand why a tax investigation is taking place. Here are a few of the top reasons (and some of them are unlikely to be your fault!)
- Changes in income and expenses
- Repeat errors in tax returns
- Data from third parties that doesn’t add up
- Excessive or unusual claims
- Late or non-existent filing
- A lifestyle that doesn’t match reported income
- Reports from a third party
You then need to understand the type of tax investigation. Typically, there are three types of investigations; a full enquiry, aspect enquiry, and a random check.
How do you respond to contact from HMRC?
This is really a simple question to answer – stay calm and act quickly.
It’s important to read the letter carefully and make sure that you understand exactly what HMRC is asking for. Then, you need to make sure that you don’t ignore it. Get your records together as quickly as possible, and seek professional advice on compliance.
Reduce the risk of a tax investigation
No one wants a knock at the door, so it’s important to understand how to avoid an investigation, and how to keep
your business finances organised.
- Understand best practice – it’s really important to get reliable software that will reduce your risk of making a mistake or missing the filing deadline.
- Be transparent with any financial changes – if you’ve lost income or have a sudden spike in spending, it’s worth letting HMRC know. Be proactive in explaining these changes.
- Cooperation with HMRC – don’t ignore their requests for information, make sure you respond to enquiries, await their report, and if you don’t agree, make sure you appeal.
- Seek advice – don’t wait until the deadline. Please ask questions early and find a suitable bookkeeper/accountant to help rectify the situation.
- Monitor your finances regularly – it’s important to keep an eye on your finances and catch any discrepancies or errors before you file your return
Hopefully, these tips are all helpful to keeping you and your business out of financial trouble.
After the Investigation
Once HMRC have carried out their investigation, it’s important that you keep your financial records up to date. You might consider working with a bookkeeper for every day reconciliation, or collaborating with an accountant to improve forward planning.
To summarise your actions after the investigation:
- Review the findings carefully. If you disagree, you may have the right to appeal or engage in dispute resolution.
- Pay any tax, interest or penalties (or confirm repayment if HMRC owes you).
- Update your systems – learn from what was scrutinised.
Document what worked and what didn’t, and use the experience to make your business stronger.
If you would like some ad-hoc support from qualified bookkeepers to avoid making mistakes with your business finances, please contact us today.