Tax investigations. Just the phrase alone is enough to cause a stir. Whether you run a business or are self-employed, an investigation into your finances can catch you off-guard.
Not only can they be disruptive to your day-to-day, but they can be a cause for concern – even if you’ve done everything by the book. There are many reasons why the Government may want to take a closer look at your tax history.
So, what happens during an HMRC investigation? Here’s everything you need to know and how to prepare.
Why am I being investigated?
If HMRC contacts you to inform you it will be launching an enquiry into your tax, it’s not necessarily because you’ve done anything wrong.
The Government can start an investigation into your finances completely at random. This doesn’t make HMRC the enemy; it’s just a cautionary measure.
That said, if HMRC believes you’ve deliberately underpaid tax or haven’t declared all of your taxable income, you’ll very likely have to undergo the process.
How will I know about the investigation?
If you’re due to have your taxes investigated, you’ll receive a letter through the post from HMRC. This will be a formal notice telling you what evidence you need to gather and what area of your taxes will be under scrutiny.
The scope of your enquiry will vary, depending on the severity of the situation. There are three main types of tax investigation:
- Full enquiry. A full enquiry will leave no stone unturned. HMRC will launch a full investigation if it believes there’s a significant risk of error in your tax reporting.
- Aspect enquiry. Under this process, you’ll only have specific areas of your taxes investigated. These are usually launched to address genuine mistakes, misunderstandings or into a specific area of your taxes. Don’t let this fool you into thinking an aspect enquiry isn’t as important as a full one.
- Random enquiry. As the name suggests, this is when HMRC launches an investigation completely at random.
What should I do next?
As soon as you’re notified about the investigation, you’ll need to gather supporting documents reflecting the tax return in question. This will include any expense receipts, invoices, bookkeeping and bank statements.
Now would be the perfect time to contact your accountant, who can help you organise everything HMRC will need.
What happens during the investigation?
Once you’ve been given notice and gathered the requested financial documents, HMRC will run through them with a fine-toothed comb.
You can dispute HMRC’s reasoning for investigating your taxes, but you have to be sure you have a leg to stand on. Having an accountant support you during this process can save you a lot of grief as they’ll interact with the tax authority for you.
Once the investigation is over, you’ll receive one of two documents:
- a decision notice
- a contract settlement.
A decision notice will usually arrive in a letter providing you with details on HMRC’s final outcome. This usually includes a penalty notice (if you owe tax or have made deliberate mistakes).
A contract settlement, on the other hand, is a written agreement that the taxpayer (you) will arrange payments and HMRC will not exercise any of its powers to recover the money.
We’ll fight your corner
We don’t think it’s productive to paint HMRC as the enemy. Even if you are due to undergo an investigation, it’s nothing personal (we hope). Being the subject of an enquiry is a troublesome thing to go through on your own. We’re here to tell you, you don’t have to do it solo.
We always aim to support and advise our clients on the best ways to maintain a healthy tax record. So, if you’ve received that letter from HMRC or want to prepare in case it does happen, we’ll be happy to help.