The possibility of facing a tax inspection drives fear into the hearts of many business owners. SMEs in particular tend to be worried about having their tax affairs scrutinised. Even if your conscience is clear, you’ve paid all taxes due and have nothing to hide, the consequences of having to spend your precious admin time to go over it all again can cause real operational upsets. Worse still is the prospect of having to defend your position and negotiate with HMRC officials.
As one tax accountant puts it: “As well as being more likely for SMEs to make a mistake when it comes to their taxes, they are also less likely to effectively negotiate if they disagree with HMRC’s demands as they will feel out of their depth and fear arguing with the taxman will lead to substantial costs and protracted disruption.”
But with an increasing number of tax investigations being carried out by HMRC on businesses of all sizes, what can you do? Don’t panic, is the first rule. After all, your business may have been chosen completely at random.
To help you deal calmly and effectively with an HMRC tax inspection, we recommend that you follow these 5 steps:
- Think before you act
If you have received a tax investigation letter, read it carefully. Obviously, no letter from HMRC should ever be ignored but nor does it need to be responded to in a tearing hurry. Make sure you understand what is being requested – if you’re not sure or the information you are asked to provide is complicated, call your accountant for professional advice.
- Find out what sort of tax enquiry is taking place
It is unlikely that you will be given the reason for your inspection. It may be obvious if, for instance, a simple omission has been spotted on your tax return. Or you may have attracted the attention of the tax authorities if your income fluctuates wildly or you are claiming a high proportion of expenses.
There are three levels of tax enquiry:
- Aspect enquiries deal with a partial reassessment of your tax information.
- Full enquiries will inspect the whole of your tax return.
- Random full enquiries can take place in a geographic or sector specific HMRC target area, with SMEs most likely to be affected.
- Consider the consequences
Tax inspections can vary in length and complexity. Some can be dealt with in one letter, others can drag on for months. Technically, HMRC have the power to go back over 20 years’ worth of tax returns along with extensive powers to request and obtain information from yourself and third parties.
If you discover an error or omission yourself, you should report it to HMRC straight away – this is called voluntary disclosure.
If inconsistencies are found in your tax records, you will obviously have to pay the extra tax owed, plus typically a fine. In case of deliberate fraud, especially for VAT and PAYE fraud, you can be prosecuted and even go to prison.
- Consult with your tax accountant
Every tax inspection deserves to be taken seriously – even if you have done everything by the book and nothing to worry about. In real terms, this mean that your business needs to find an effective and credible way to supply the necessary information to satisfy HMRC.
“It is imperative you have a good accountant fighting your corner,” says one tax expert. “They will make sure that you do what you need to do, on time and with the minimum of stress. Without an accountant it will be a very one sided situation, with HMRC having all the advantages and power.”
A former HMRC investigator also recognises the wisdom of having a tax specialist working for you. “Most people don’t try to service their own cars because these days that is far too complicated for us to cope with, and there is far too much at stake to get it wrong. And it’s exactly the same with an investigation.”
- Make contact with HMRC
Now that you are fully aware of the situation and know what is expected of you, it’s time to sit down with your tax accountant and ask him to make contact with HMRC on behalf of your business.
An experienced business taxation adviser can help with
- Collating information and making sure the correct information is sent to HMRC
- Dealing with further or ongoing requests for information
- Ensuring that the enquiry is not prolonged unnecessarily
- Helping to negotiate a final settlement for your company, including any interest and penalties
- Helping to negotiate payment times
Article provided by Mike James, an independent content writer working together with London-based Chartered Accountants Wellden Turnbull, who were consulted over the information in this post.