What does an HMRC tax investigation involve?

tax investigation advice

Whether you’re a growing business or a big corporation, the HMRC investigation process can be invasive and time consuming for any business. It is important therefore to be fully informed of what an HMRC investigation process will entail and to know why you or your business may be investigated. Here we explain the different types of a tax investigation, and what the HMRC investigation process involves.

Alexander & Co has expert accountants who can look after all aspects of your tax, to minimise the likelihood of an HMRC investigation. Furthermore, in the event of a random investigation, we will be able to liaise directly with HMRC and take care of this on your behalf.

What is an HMRC Investigation? 

HMRC is the governmental department that is responsible for the collection of taxes. At any time, HMRC has the right to perform checks on you or your business to ensure that the right amount of tax is being paid. If your business is selected, you will receive a letter or phone call from HMRC in which they will inform you about what they want to investigate. For example, they may want to cover aspects such as: 

  • The taxes that you pay 
  • Your tax calculations and accounts
  • Your company tax return 
  • Your PAYE records and returns if you’re an employer 

You may also be subjected to an HMRC VAT investigation or an HMRC self-assessment investigation. Other taxes that the process investigates include Capital Gains Tax, Corporation Tax, IR35, indeed HMRC can investigate any tax. 

What taxes does HMRC Investigate?

Many people incorrectly believe that HMRC only investigates Income Tax. Infact, HMRC investigates all taxes, notably: 

  • Capital Gains Tax
  • Construction Industry Scheme (CIS)
  • Corporation Tax
  • Income Tax
  • IR35
  • VAT
  • Any other tax

What is the HMRC investigation process? 

During an investigation, HMRC may ask to visit you in person at your home, business or your accountant’s office. A penalty will incur if HMRC sends you a notice and you don’t send the required information or refuse the visit. However, if you’re seriously ill or going through a grieving process, you won’t have to pay the fee. 

What Triggers an HMRC investigation?

There are a number of reasons that may trigger an HMRC investigation. Most of these are triggered by sophisticated data mining tools, used by HMRC’s Central Risk team. These identify unusual activities on accounts or trends in particular industries. Some of the main reasons include:

  • An anonymous tip-off to HMRC
  • Being classified as “high risk” (e.g. your own business or your industry has a high amount of cash transactions)
  • Tax returns are frequently filled late
  • There are noticeable inconsistencies between your tax returns (such as significant changes in income from one year to the next)
  • Your accounts may not match those that are typical for your industry
  • Your business is within an evolving or fast-growing industry – HMRC often monitors these with interest, making it more likely to launch an enquiry 

what does a hmrc tax investigation involve

The three types of tax investigation 

In an HMRC investigation, three different levels of audit can be carried out. 

1. Full enquiry 

A full enquiry may be conducted if HMRC feel that there is a strong risk of error in your tax. In investigations like these, all of the business records related to the company will come under scrutiny. With regards to limited companies, HMRC may closely assess the tax affairs of company directors, as well as the affairs of the business itself. 

2. Aspect enquiry 

In this type of assessment, HMRC will only look at a specific aspect of your accounts. For example, they may examine the inconsistencies in a section of a recent tax return. 

3. Random check 

It could be that HMRC just want to perform a random check on your accounts. Random checks can happen at any time and occur even if your company has not triggered an alert.  

With regards to the HMRC investigation time limits, the limit for normal cases is four years, in which HMRC can go back to claim money from taxpayers. However, if someone has been continuously careless, i.e. submitting tax returns with mistakes, the HMRC investigation process can journey back six years. However, these are not set in stone. If HMRC suspects deliberate activity, such as tax evasion or criminal activity, it can extend the time limit to 20 years.

What happens after the HMRC investigation process? 

After the check, HMRC will write directly to you or your accountant about your results. You may be eligible for a refund if you have paid too much tax and may also get interest on the amount you’re owed. You may, however, be asked to pay additional tax within 30 days if you owe more and you’ll normally have to pay interest from the date the tax was due. You may also have to pay a penalty. If you do experience any problems in paying back, inform the officer who is dealing with the check. 

How to prevent a tax investigation by HMRC

Whilst a random check cannot be prevented, noticeably incorrect figures on a tax return can often trigger other types of HMRC investigations. With this in mind, it’s best to make sure that your tax returns are accurate and checked by a qualified accountant before submission.

An accountant will provide you with professional financial advice to help you to stay safe from financial danger. Furthermore, in the event of a random check, an accountant will be able to liaise directly with HMRC to ensure this does not disrupt your day-to-day business activities and the investigation is as least invasive as possible.

At Alexander & Co, our team of experienced accountants can assist. We will provide you with expert tax advice and ensure that everything related to your taxes is taken care of correctly. This means that you can focus solely on your business and not an HMRC investigation. To get us in touch, fill in our short enquiry form or call us on 0161 832 4841.