Running your own business or being a free trader has a ton of benefits. You work for yourself, you’re your own boss and you get to dictate how your business is run.
But there are some parts about running your own business that isn’t particularly fun. Making sure that your accounts are up to order and sorting out your HMRC returns is one of them.
Gah, even saying the word tax can bore people to sleep. It’s confusing and complicated. But if you don’t do it right, you could face fines or worse, an investigation from the HMRC themselves.
And that’s a big threat, isn’t it? To have the HMRC come down on your business like a lightning strike from the Zeus. That’s understandable. No one wants the HMRC scrutinising your business after all. But most of this threat comes from a lack of understanding of what an HMRC investigation is.
That’s where we come in. Without any further ado, let’s shine some light on what HMRC investigations are, how to prevent them from happening and what you need to prepare if you’re being investigated.
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What are HMRC investigations?
HMRC investigations are exactly as they sound. They’re investigations into your accounts that are carried out by the HMRC at any time.
This is to make sure that everyone is paying the right amount of tax. And with the tax gap currently at £35 billion, the HMRC aren’t going to slow down their investigations any time soon.
If you’re not familiar with the tax gap, this means that the amount of tax that should be paid is £35 billion less than what is actually paid. That’s a pretty big number to ignore.
So, if the HMRC believes that you might be paying the wrong amount of tax, they can investigate you at any time.
Are all HMRC investigations the same?
No. There are three different types of investigations that the HMRC can carry out.
1. Full enquiry
This is the most in-depth and serious investigation that the HMRC can carry out.
A full enquiry happens when the HMRC believes there’s a significant error in your tax and will start to review the entirety of your business records. For bigger, limited companies, the HMRC might also look at the tax affairs of all company directors alongside business records.
2. Aspect enquiry
Rather than a full investigation into your accounts, this investigation focuses on a particular aspect. This investigation happens when there’s an inconsistency in your tax returns and is aimed to clear up the errors and make sure that everything is exactly as it should be.
3. Random check
Exactly as the name sounds, this is a random check of your accounts. It can happen to anyone, whether there’s an error in your accounts or not.
Random checks happen because, without a glaringly obvious error, it can be difficult to tell who is paying the wrong amount of tax. Random checks help the HMRC get a better grasp of this and help recuperate losses.
Each year, tax enquires can help the government generate over £20 billion back in losses, so don’t be prepared for it to stop anytime soon.
How do I know if HMRC is investigating me?
The HMRC will notify you – or your accountant – if you are being investigated. There are no secret investigations. If the HMRC is carrying out any of the above three checks on your company, they’ll tell you about it.
Your notification will arrive by an official investigation letter or phone call. During this, the HMRC will tell you exactly which parts of your account and return that they want to look at. This includes areas like:
- How much tax you currently pay;
- Your accounts and tax calculations;
- Your Self Assessment tax return or Company Tax Return;
- PAYE records and returns if you’re an employer;
- Your VAT returns and records if you’re VAT-registered.
If you haven’t received a notification, you’re in the clear for HMRC investigations. But if you’ve received one, we’ll cover how you need to prepare in the next section…
How to prepare for your HMRC investigation
Getting a letter from HMRC isn’t great news. But the good thing is that they will give you a list of all the information and resources that they need from you. The HMRC will also provide you with a date where all this evidence is due, usually 30-25 days from the date of your notification.
If you don’t send all the requirements by this date, you can face further fines and penalties. It’s better to just send what they ask.
In some investigations, the HMRC may also request a meeting, phone call or even to visit your offices. This doesn’t always happen though and you are free to get professional advice to guide you through these instances.
So, here’s what you can do to make sure that your HMRC investigation goes as well as it can.
1. Make sure your accounts are in tip-top shape
This should be a requirement for any time of the year. But if the HMRC is doing an investigation, particularly a full or aspect inquiry, then you might want to consider just triple checking that all the information is correct and up-to-date.
The honest truth is that mistakes can happen. Particularly if you’re doing your own bookkeeping.
One way to minimise this is to invest in accounting software that can keep electronic records and automatically do the sums for you. Error-free.
2. Send the HMRC all the requested information
The HMRC have already sent you a list of everything they need from you in their notification letter. Once you’re satisfied that all your accounts are up to date, the next important thing is to send this over before the deadline.
The HMRC will take care of the rest from there.
If anything else is needed, they’ll get back in touch. That’s it. You don’t need to panic, all that’s left is to carry on as normal while you wait for the verdict.
That’s it. Seems pretty simple right?
But of course, if you don’t want to deal with this yourself you can always hire an accountant to help you out. They’ll have years of experience in bookkeeping and keeping your accounts in your best shape and will be able to advise you through every step of the HMRC investigation.
Just make sure that you hire the right accountant for your company. If you’re unsure, ask these 5 essential questions before making your hiring decision.
How long does HMRC have to investigate?
There’s no set time limit for how long the HMRC have to complete an investigation. It, unfortunately, goes on as long as it needs to.
For relatively simple cases, this could be cleared up within weeks. In more complex cases, you could be facing months of investigation. A full inquiry could even be over a year long. And naturally, the longer an HMRC investigation goes on, the more it’s likely to cost you.
The good news is that there are time limits on when the HMRC can start an investigation. Full warning though, it’s a rather big timeframe.
Basically, the HMRC has an entire year to start an investigation from your tax submission deadline.
So if your submission deadline was January, they would have until the following January to submit a claim.
If you’ve lasted a year, you’re in the clear! It’s just the following year you need to worry about.
But if the HMRC submit an investigation, they can access records from the past 4 years. If there’s evidence of intent to mislead or submit errors, the HMRC can go up to 6 years back. For serious fraud cases, up to 20 years of records can be investigated.
How do I stop HMRC investigation?
You can’t stop an investigation from happening. Sorry, but there’s nothing to do about it.
You can reduce the chances of being investigated by keeping your accounts up to date and accurate at all times.
Whether you’re doing this all yourself, using an online accounting service or hiring an accountant, this is the only real way to keep HMRC investigations at bay.
Sadly, there’s nothing to be done about random checks. They are, after all, random. It’s all down to chance.
Can HMRC investigate a dissolved company?
Yes. The HMRC can investigate a dissolved company.
Sorry to say that, dissolving your company isn’t a get out of jail free card for an HMRC investigation. If the HMRC feels like your business is worth investigating, they can apply for it to be restored to the register.
It’s a relatively unlikely event though.
Nevertheless, the main takeaway here is that even if you have a dissolved company, you need to keep records for up to 6 years in case of an investigation or any inquiries that might happen.
What are the consequences of an HMRC investigation?
Once the HMRC finishes their investigation, they’ll send you the outcome by letter. This will detail everything that they believe needs to be repaid to them.
If they think you’ve paid the wrong amount of tax by a genuine mistake (hey, it happens!), you’ll normally just have to make up the difference within 30 days. It’s a relatively simple process and easy to resolve. Sometimes, the mistakes can be so minor that you won’t even notice the difference.
Note the sometimes though. It depends on every company and situation. I’m in no way guaranteeing this for you.
However, if the HMRC believes you’ve deliberately falsified your return, you will be fined a penalty. This means you won’t just have to make up the difference in tax, but you’ll also be charged an extra 15-100% on top of that for your mistake.
In some cases, the HMRC can charge up to 300% penalty. It may seem harsh, but what other way will businesses learn to get their tax done right? If the HMRC were lenient, everyone would avoid their tax.
For more serious cases, like fraud, you might also face criminal prosecution. But this is highly unlikely for small businesses and the self-employed.
If you don’t agree with the outcome, you can appeal it within 30 days. If you choose to do this, it’s recommended to seek the advice of an expert to help build your claim. Otherwise, it’s best to just accept your fate, pay your dues and move on.
There could be worse repercussions out there. Trust me.
HMRC investigations in a nutshell
The HMRC have a right to investigate your accounts at any given time to ensure that you’re paying the right amount of tax.
There are three types of investigation:
- A full inquiry, which explores all of your accounts;
- An aspect inquiry, which looks at a particular part of your accounts;
- A random check, to ensure your accounts are as they should be.
The HMRC has one year to notify you of an investigation from your tax return deadline and can look as far back as 4-6 years. Your notification of the investigation will detail everything you need to send to the HMRC.
Once the investigation is complete, they will send you an outcome and the amount owed to them. This will be the difference in tax, as well as any penalties they determine.
The best way to prevent an HMRC investigation from happening is to keep your accounts accurate and up to date. For more help and information, visit our accounting tips here.