Everything You Need to Know About UK Tax Investigations

Even the most cautious and financially responsible business owner is likely to be terrified by the prospect of a UK tax probe. The possibility that HMRC would scrutinize all of your financial records makes you doubt every tax return you've ever filed, every invoice you've ever recorded, and every expense you've ever claimed.

In truth, tax investigations in the United Kingdom are rarely a reason for alarm. Fear is frequently the result of a misinterpretation of a circumstance. Today, we'll go over all you need to know about tax investigations so you may be prepared for what's ahead and minimise the damage they have on your personal and professional life.

What is the definition of a tax investigation?

A tax inquiry is a financial audit done by HMRC, Her Majesty's Revenue and Customs, a government-owned organisation in the United Kingdom.

A tax investigation is exactly what it sounds like: a look into your tax payments. HMRC will contact you by phone or email if you are chosen for a tax investigation. HMRC will tell you exactly what kind of information they want to look at through this communication. They'll ask for specific paperwork and business records from you at this time.

As a governing authority in the United Kingdom, HMRC has the legal ability to audit your finances, which means you must comply with their requirements. They may request to view a variety of documents, including VAT information, PAYE payment proofs, income tax records, and so on.

What Happens if HMRC Launches an Investigation?

The amount of information HMRC will request and the level of depth they will go into depends on the type of tax investigation you are facing. HMRC goes through three main tax inquiry processes:

Thorough Enquiry – If you are chosen for a full investigation, HMRC will look into all parts of your tax and tax history.

Aspect Enquiry – HMRC will look into one specific aspect of your tax during an aspect enquiry. They might, for example, pay more attention to income tax.

Random Enquiry – As the name implies, HMRC will conduct a series of random checks.

HMRC will begin probing once they have all of the facts they require to commence their tax investigation. They'll be examining your accounts and asking you questions about your money during the audit – sometimes in person, sometimes via electronic contact. HMRC is looking for flaws in the sources they have, ensuring that no numbers have been overlooked and that everything is in order.

HMRC has a convoluted process, but the major issues for business owners who are audited are the stress factors involved and the time it takes to comply with all of HMRC's requests. Aside from that, a tax investigation is rather straightforward for you. All you have to do is give HMRC the information they require and respond to any questions they may have.

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How long does it take for a tax investigation to be completed?

There is no definitive time frame for a tax investigation. The time of the investigation is determined by the severity of any issues discovered, how well you keep records, and the size of your company. It also depends on whether you want a thorough investigation or just a short check at your documents.

A tax investigation can last as little as three months for small enterprises with no history of financial malfeasance and good accounting and company records. If there is proof of difficulties such as tax fraud, or if you have a huge firm that has been around for a long time, a tax inquiry can be a lengthy procedure that can take up to two years.

What Should I Do If I'm Facing a Tax Investigation?

If you are guilty of tax evasion, you should seek legal advice and admit to any wrongdoing right away, because HMRC audits are thorough and done by specialists. They'll find evidence of criminal activities.

However, this will not be the case for the vast majority of people. Citizens who follow the law do not need to seek legal guidance or prepare for a barrage of allegations. That isn't to say you can't and shouldn't plan ahead.

For a variety of reasons, proper preparation for a tax investigation is beneficial. For starters, it can assist alleviate personal tension and prevent stress from piling up in the wake of your tax investigation. Tax investigations can also be made a lot easier, run a lot smoother, and terminate a lot faster if you prepare ahead of time. If you can provide HMRC with everything they need to accomplish their job, they will be able to do it more quickly.

Here are our top suggestions for preparing for a tax investigation:

• Always be ready for anything.

It's preferable to be proactive rather than reactive when it comes to tax investigations. If you're always prepared to face a tax audit, you'll be in good shape. This entails effective tax planning, recognising your tax liability, and maintaining correct and up-to-date bookkeeping.

• Track Down Your Proof

Once you've been alerted that a tax inquiry is underway, begin gathering all of your financial papers so that HMRC may quickly access them. This includes invoices, receipts, transaction records, financial reports, and any other accounting information you have.

• Seek the advice of a professional.

Getting therapy is not an admission of guilt, but it can be beneficial. Investigations into tax evasion can be tough and time-consuming. If you are unsure about your capacity to manage HMRC on your own, getting help from a professional, such as an online accountant, can be invaluable. We've handled a lot of HMRC tax inquiries at RS Accountancy. We can communicate with HMRC on your behalf, assist you in gathering the necessary information, and guide you through the procedure.

• Examine your financial statements

Examine your historical data to conduct an internal audit of your accounts, or hire an accountant to perform it for you. RS Accountancy, for example, provides a personal tax investigation service. A self-audit before a tax investigation is designed to go over compliance checks and identify any potential issues before HMRC notices them. If your audit reveals any differences, you can submit them to HMRC as soon as possible to show transparency and avoid being held liable for innocent mistakes, as well as to refute any charges of tax fraud.

What if I don't have all of the information HMRC requires for the tax investigation?

It's tough to lose access to all evidence and records HMRC might want in the digital age. You shouldn't have to worry about not being able to offer information essential for the service because everything is communicated and stored online.

But, for the purpose of argument, let's pretend you don't have any evidence. In this case, HMRC may investigate your costs and discover that you claimed for a computer two years ago for which you paid cash and do not have the receipt. What should you do if this happens to you?

You must not be alarmed in these circumstances. Instead, you'll have to explain your case to HMRC and come up with a reasonable solution. You may not have receipts for your purchases, but you may have proof in the shape of the thing you bought. Auditors will collaborate with you to arrive at a fair and reasonable conclusion.

To avoid problems caused by a lack of information, we recommend that you:

• You immediately begin preserving digital records of all company transactions, ensuring that the proof is not only accessible but also easy to trace and share.
• Contact a certified public accountant to discuss your specific difficulties and receive assistance in finding a satisfying solution.

How far back can you go in a tax investigation?

HMRC tax investigations have the authority to examine tax to any extent they see fit depending on any evidence they come across. In practice, when it comes to looking into historical data, HMRC normally follows a set of broad criteria.

• If HMRC discovers no errors in the previous year's tax return, they will usually close the case unless they have more evidence to suspect faults in previous years' tax returns.
• If they detect a mistake on your most recent tax return, they will normally look into the preceding four years' filings as well. This will occur if the error was done accidentally and without malice.
• HMRC will normally look into the last six years of your returns if you committed an error owing to negligence, such as neglecting to correctly record costs or neglecting to keep documentation of revenue.
• If HMRC discovers you have been dishonest or fraudulent with your tax returns and have broken the law on purpose, they will launch a complete tax inquiry going back up to 20 years.

So, what does this imply for the vast majority of small business owners? It implies that if you've tried to submit self-assessment tax honestly and accurately, you shouldn't have to deal with tax inquiries that go back more than four years. Even if you've been a little sloppy, you'll probably have to deal with up to six years' worth of evidence.