How do you minimise the chance of being investigated by HMRC?

Tax investigations into people and into businesses are lengthy, stressful, and tiring affairs. Sometimes, there’s no other reason than random chance for why you have been chosen to be placed under scrutiny. That’s why we always recommend to clients that they take out insurance to cover the costs involved with an HMRC investigation – call us for more about the options available to you.

In this article, TWP Accounting takes you through the entire process of a tax investigation from being contacted to the final outcome.

How do I find out whether I am being investigated and why?

The first you’ll know that you or your company is under investigation will be a written notice from HMRC informing you so. They will generally not give you the reason why they have chosen to look far more closely at your financial affairs in the notice.

You will be expected to provide a written response within 30-35 days of receiving the notice.

Although a tax investigation can happen at random, there are normally reasons behind them, the most common of which are continued non-compliance by sending either your self-assessment and/or Corporation Tax returns and making your payments late.

Other factors may include HMRC believing that you are not taking enough personal income out of your business, if you operate in a sector where cash is the dominant payment method, or your personal expenses look to high in relation to the level of your income.

What will they be looking for?

What they’re looking for will depend on the reason behind their enquiry.

You’ll be expected to present them with your bank statement, sales invoices, supplier invoices, till rolls, credit card statement, paying-in slips, chequebook slips, receipts, and payroll records. More often than not with current inspections, they will also want access to your online bookkeeping package like Xero.

HMRC will generally want to see all of your financial records for a given tax year (or years) however some enquiries will only require you to provide the documentation and records relating to part of a tax year.

How long do tax inspections take?

According to the Federation of Small Businesses, the average tax investigation takes up to 16 months. For those investigations relating to part of a tax year, you can expect the process to last at least six months.

While the investigation is taking place, it’s best to cooperate fully and quickly. Each request for information you receive will normally have a time limit for response and it’s better to make sure you achieve those deadlines or risk facing financial penalties.

At all times, make sure you have an accountant acting on your behalf, especially if the taxman goes quiet for a long time and you don’t hear anything from them about your case.

Why have they asked for a meeting?

A tax inspector can ask you to attend a meeting with them to hurry the progress of their enquiry. You can meet them at your premises, at TWP Accounting’s premises, or at their office. You don’t have to attend the meeting but we would strongly advise you as your accountants that you do so.

During the meeting, the tax inspector will take notes and ask you questions about the history of the business, the type of work you undertake, VAT, PAYE, who does what within your business, any changes made to the company in recent years, and how you keep your financial records.

You’ll face questions about private and business expenditure, invoices that you’ve issued, and how you and your company handle cash and banking.

If your limited company is being investigated, the inspector has the right to ask you about your and other directors’ personal and financial circumstances however the inspector cannot ask your limited company to turn over your and your fellow directors’ details.

At the end of the meeting, your tax inspector will share his or her opinion with you on the enquiry so far. Sometimes, the case will be closed at the meeting but, on other occasions, they may send you away with requests for further information complete with a timescale for the delivery of documentation to them.

What findings can they come to?

There are three possible outcomes – no adjustments to be made, minor adjustments to be made, and major adjustments to be made.

  • No adjustments – the case will be closed and you will not have to pay HMRC any money (or vice versa)
  • Minor adjustments ­– you will have to pay something to HMRC. The inspector will tell you why and how much. You will have 30 days to appeal the judgement.
  • Major adjustments – when a tax inspector decides that you owe them a lot of money, they will take the position that you have been making the same mistakes over up to 6 years. They will then adjust your previous year’s bills using the same calculations and present you with that figure for payment. HMRC may go back up to 20 years if they believe the mistakes on your returns were deliberate.

What penalties can they issue?

As well as having to find the money to pay the tax that HMRC claims you owe, you will almost certainly be required to pay a penalty. The severity of that penalty will depend on how much care they believe you took over making sure the submissions were correct, whether they thought you were trying to hide something from them deliberately, and how cooperative you were during the investigation.

How can I reduce my chances of being subject to a tax investigation?

Because of staffing issues affecting the whole of HMRC, the people and companies that the taxman chooses to investigate is normally done following a few behavioural “warning signs”, including:

  • you submit all of your returns (personal and business) on time,
  • you make payment of all taxes in full and on the due date,
  • if you need to arrange to pay HMRC over a longer time using split payments (the so-called “Time to Pay” scheme), make sure you ask for help before you are due to make payment and not after,
  • insufficient evidence for expenses claims,
  • try to avoid any mistakes on any of your tax submissions, and
  • declare every source of income.

HMRC may also single you out for investigation if your business makes little or no profit over a sustained number of years or, likewise, if your income is negligible for an extended period of time. The taxman also gets concerned about fluctuating profit levels and profit levels which are significantly higher or lower than other businesses in your sector.

Please do be aware that an estimated 7% of tax investigations are carried out at random so it can be something as simple as pure bad luck.

Contact TWP Accounting straight away if you have been notified that HMRC wishes to carry out a tax investigation on you or your company

As we mentioned earlier, some inspections occur at random and there’s nothing you could have done differently to stop being the subject of an enquiry.

However, work with your TWP Accounting partner to make sure that all your returns are made and paid on time, that they’re complete and accurate, and that you keep all the records you need to keep. If you later discover that there is an error on a tax submission, please inform us and we can represent you in dealing with HMRC.

If you have received notice from HRMC that they wish to pay you a visit to check for overall tax compliance or if you’re concerned that you may be subject to one, call us on 01932 704 700 or email

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