During the 2015/2016 financial year, HM Revenue & Customs (HMRC) estimated that £34 billion in tax was undeclared. Earlier this year it advised the Treasury Select Committee that it will be pursuing small businesses, who it estimates are responsible for 46% of this gap.
With the Telegraph estimating that one in ten of the more than five million small businesses in the UK will be facing investigation, we thought it might be helpful to offer some advice on what to do if you find yourself in this position.
Keep calm. Even if you have done everything “by the book”, being informed that you are under investigation can be unsettling. It is important to stay calm and co-operate with investigators. Innocent mistakes happen and, historically, HMRC has recognised this and responded proportionately.
Get independent expert advice. Tax investigations are a specialist area. Should you find yourself under investigation, it would be advisable to seek independent financial advice from a reputable accountant or adviser who specialises in this area. You will want someone on your side who understands not only the jargon, but also how HMRC operates. We have experience in tax investigations and disclosures for individuals, companies, trusts and partnerships.
Involving a specialist early on in the investigation can help to ensure that your case is being proactively managed, minimise investigation costs and any potential fines. Their support should allow you to continue to focus on the day-to-day running of your business and, in turn, minimise the impact of the investigation.
Know the rules and your rights. HMRC is only allowed to review records relating to the tax, tax credit or duty it have told you it will be looking at as part of its investigation. Investigators have the right to arrive unannounced and inspect a businesses’ premises. It is important to note that while HMRC representatives are permitted to visit third parties (like suppliers), they cannot inspect a business owner’s home unless it is used in the course of business or if assets (like stock) are stored there.
During a visit, investigators amongst other things have the right to:
- Ask owners and employees questions about the business, including, for example, the background of the business, what work is undertaken, any changes that have taken place in recent years, what records are kept, how they are maintained and how invoices are handled
- See company books and records including: bank, debit and/or credit card statements, cheque books and paying in slips, sales invoices, VAT records, quotes or estimates you have prepared, purchase invoices, expense receipts and payroll records
- Remove records from the premises
- Access computer files
Be honest. It is also important that you do not destroy evidence (missing records can be perceived as an attempt to hide evidence) or partially disclose information to mislead investigators. HMRC is not afraid to ask questions and has a vast array of resources at their disposal.
Should you find yourself in a situation where HMRC is determining the penalty you will have to pay as part of your settlement, having been open, honest and co-operative during the investigation is likely to work in your favour. HMRC operates a contractual disclosure facility (CDF) which allows you to disclose any errors within 60 days.
Make sure you are prepared for meetings. Not being prepared for meetings could be perceived as a lack of co-operation by HMRC. Your investigator has the powers to extract the information they need to conclude their investigation, so it is best to be honest and co-operate fully.
It is worth bearing in mind that HMRC does conduct audits at random, however SmallBusiness.co.uk cites the following as specific triggers for an investigation:
- HMRC gets a tip-off
- Regular mistakes on your returns
- Numbers fluctuate by large margins
- Years of unprofitability
- Your figures are inconsistent with industry standards
- Directors earn less than employees
- Omission of income
While there is no way to be certain you will not face a tax investigation, submitting your tax returns on time and being as accurate and thorough with your returns as possible will reduce the risk.
For more information, please get in touch with your usual BKL contact or use our enquiry form.