When you run a small business you all too often think that you are immune from HMRC tax investigations, believing that the tax collectors are only interested in the big fish, not a small person like me. Actually, that is not always the case. HMRC are much more thorough than you might think, and while the smaller company may be less in the investigation radar, they are definitely not off limits and you should by no means have the attitude of it will never happen to me. 
In recent years HMRC has made a concerted effort in an attempt to close the UK’s tax gap. In fact HMRC’s latest figures reveal there has been a significant increase in the number of tax investigations into the tax affairs of SMEs. 
Some estimates are as high as one in ten small businesses that have been affected by a tax investigation. The truth is, you may never encounter a tax investigation but there is still a chance that you are the one that does, despite what Bob in the pub says. 

Why HMRC may investigate your tax affairs 

There are many reasons HMRC may decide to start an investigation no matter what its size. Common reasons HMRC investigate small businesses include: 
A tip off – ex-partners, disgruntled employees or a competitor may suspect or have knowledge of tax-dodging activities, or be jealous of your extravagant lifestyle! 
Wildly fluctuating margins – when profits take a big hit without a reasonable explanation, HMRC will want to understand why 
Tax return mistakes – a one-off mistake is unlikely to be investigated, but regular errors will flag up suspicions 
Years without profit – if your SME operates for a prolonged period at a loss, HMRC will be curious as to why and how your business is still running 
Consistently filing late returns 
Your tax returns are wildly different to other businesses in your industry sector 
Your business happens to be in a sector that HMRC is targeting 
You operate a cash only business 

Are there different types of tax investigation? 

HMRC can open a tax investigation which could fall into either a full, aspect or random case. 
A full tax investigation is as the name implies, looking at the full records. It is when HMRC believes there is significant chance of error in the figures you have submitted. The investigation can also include looking at your own personal records to ensure they tie into what the company has declared. As you can expect, this can take some time to complete, sometimes even over a year. 
The most serious type of investigation is a Code of Practice 9 (commonly known as COP 9) which is opened when HMRC suspects fraudulent behaviour. 
An aspect investigation happens when HMRC generally just want to query a specific area of your tax return, mainly because it doesn’t look right to them. They will focus on the specific area of the return. This type of investigation is usually associated with genuine mistakes or the need for further information to enable HMRC to clarify specific points. Small investigations on a single aspect of your tax return usually take between three and six months to complete. 
Random tax inspections are simply down to fate. There could be a contributing factor like the industry you are in, pervious history or it could really just be that you were literally chosen “out of the hat” 

Is there any way to avoid a tax investigation? 

Ultimately no, you cannot. But you can take steps to minimise the chances of an investigation. The best position is to keep your business off the HMRC tax investigation radar. Follow these steps to reduce the chances: 
File tax returns on time 
Use an accountant 
Pay tax bills on time 
Explain any significant fluctuations 
Don’t run a cash-only business 

I’m being investigated, what should I do? 

Getting correspondence that your business is about to be investigated by HMRC can be a scary feeling. However, the first thing to do is NOT to panic. HMRC carries out many random investigations, so it’s not necessarily an indication that the taxman thinks you have done something wrong. 
The first thing to do is contact us. We can guide and help you along every step of the way. If we act as your agent we can also correspond with HMRC on your behalf. 
Some other do’s and don’t 
Contact your accountant for advice 
Let your accountant or specialist tax adviser deal with any correspondence 
DO NOT ignore the enquiry 
Respond within the designated time-frame (usually within 30 days) 
Answer all questions asked in the letter from HMRC fully and provide any information requested 
Refer to the Tax Payers’ Charter to know your rights 
If you are asked to meet with an inspector, always ask to see the agenda before you meet 
Importantly, take a breath, comply, establish the level of enquiry and get a good accountant or tax specialist to fight your corner. It could save you a lot in penalties if you are found to be owing tax. 
Being investigated by HMRC? Call the team at Holmes and Company on 01525 851101 or contact us here 
Tagged as: Accounting, HMRC, Tax
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