What is a tax investigation?
Tax investigations are notorious for being bad news, but that is not always the case. Although tax investigations are often triggered by a suspicion of fraudulent activity or a discrepancy in your tax return figures, there are instances where tax investigations are carried out at random.
Most businesses may be familiar with routine tax audits and in more serious cases, a business may need to face a tax investigation.
Who carries out a tax investigation?
Tax investigations are carried out by HM Revenue & Customs (HMRC). When you are in the position of being investigated, HMRC will get in contact with you to let you know when you are going to be investigated and what documents you will need to provide them with. The information will come in a letter.
In the letter HMRC will tell you the nature of the investigation and why (if any particular reason) you are being investigated. Although, no reason has to be given to say why you are being investigated, however your accountant can explain to you why you are being investigated.
Reason for an investigation
Investigation can occur for a number of reasons. The main reason is if HMRC has a reason to suspect that you are hiding your income or not paying your taxes. You are more likely to get investigated if you:
- Are in a HMRC target area
- Are suspected of omission
- File tax returns late
- Have inconsistencies or significant variations between tax returns
- Have costs that are unusually high for the industry you work in
- Have a tip against you received by HMRC
- Operate in a high risk industry that consists of regular cash payments
HMRC can also carry out investigation at random as a routine to make sure that businesses across the United Kingdom are being compliant to tax laws.
What documents are involved in a tax investigation?
Every tax investigation is different and will depend on the nature of the investigation and the type of businesses. There are generally two different types of tax investigations, aspect tax investigations and full tax investigations.
As the name implies, a full tax investigation will be an enquiry on all aspects of your tax returns and income. Aspect tax investigations focus on a certain part of your tax returns and income. If HMRC are concerned with a certain aspect of a tax return they will only investigate that aspect if otherwise prompted not to.
Before a tax investigation HMRC can usually ask you to submit all records maintained by the business for the year your tax investigation is taking place. Some documents that HMRC may request will include:
- Bank statements
- Credit card statements
- Chequebooks and paying in slips
- VAT records
- Sales invoices
- Job quotes or estimates
- Payroll records
- Purchase invoices and expense receipts.
Depending on the type of tax investigation, HMRC may request some of the following paperwork but not all listed above.
How long is a tax investigation?
Tax investigations will usually last between 3 to 16 months. The duration of a tax investigation will depend on the extent of the enquiry. For aspect tax investigations, it can go from 3 months to 6 months. Full tax investigations will usually last longer which is up to 16 months.
When you receive the initial contact letter from HMRC stating that you are to be investigated, it is best to respond within he given time frame to avoid further action from HMRC. If you don’t respond, they can issue a Schedule 36 FA 2008 information notice. This orders you to produce documents to HMRC and if this is not met, you will face a monetary fine.
Getting a tax investigations specialist
Tax investigations can be stressful for business owners. It is a good idea to get some professional guidance if:
- You have never been through a tax investigation
- Don’t know how to proceed after getting a tax investigation letter from HMRC
- Need extra support and advice from a professional in taxation and accountancy
It is recommended to hire an accountant or if you already have an accountant to consult them about the upcoming tax investigation. Tax investigations can be resolved by trusted accountants. From there they will be able to professionally assess the situation and the extent of the investigation and will also be able to help you produce the correct documents and get through the entire investigation smoothly.
A lot of times there is nothing to worry about when it comes to a tax investigation. Making sure that you comply with tax laws and making sure that you file your tax returns on time will help to avoid another investigation.