How to deal with a HMRC tax investigation of your business

How to deal with a HMRC tax investigation of your business
Clive Lewis
Clive LewisICAEW

Posted: Tue 15th May 2018

Having an investigation by HMRC can be daunting and frightening for a business owner, not least because it can be seen by them as a distraction from running the business. However there are practical steps a business can take to make the investigation as painless as possible as Clive Lewis, head of enterprise at the Institute of Chartered Accountants in England and Wales (ICAEW), explains.

The steps include:

  • Keep invoices for sales and purchases; receipts for business expenses and bank records. Good records will also save you time and help you run your business more efficiently.

  • HMRC will carry out a compliance check on a self-assessment, corporation tax return or VAT return if they think that something is incorrect. For example, when figures appear incorrect, a business makes a large claim for VAT or one with a large turnover declares a small amount of tax.

  • Most cases are settled by reaching an agreement with HMRC or businesses can ask for a review or appeal against most of HMRC's decisions.

  • If HMRC decides to look at your business records they will usually contact businesses by telephone. The call should take between 10-15 minutes and HMRC will ask questions to make sure companies meeting their legal responsibilities.

  • From the replies, HMRC will assess whether a business can submit an accurate tax return from its records; if further action will be taken; if a business needs some additional help and support and whether the case needs a face to face visit.

  • HMRC will contact you to agree a date and time if they think a business requires a face to face visit. The visit will take around two hours.

  • Depending on the outcome of a compliance check or business records check a business may have to pay additional tax as well as facing penalties.

  • Legally businesses have to keep records for Income Tax, VAT and payroll.

Impact of Making Tax Digital

It is worth bearing in mind that HMRC will have greater visibility of a business' records when Making Tax Digital (MTD) comes in.

This starts in April 2019 when VAT registered businesses with a turnover above the VAT threshold (currently £85,000) will be required to maintain digital records and will need to send VAT information to HMRC.

It is expected that businesses will start filing returns for Income Tax and Corporation Tax the following year (April 2020). Instead of one annual return the government wants businesses to make returns quarterly, giving HMRC greater insights into a business trading activities

How will MTD impact accounting records?

The longer term impact of MTD will be to drive businesses to using accounting software through the cloud whereby data is stored offsite.

A move to the cloud will allow users to produce accounts on Apple Macs and other non-Microsoft platforms, especially mobile devices, since the only requirement will be an internet connection and a browser.

Property Income will also be affected by MTD

Individuals with property income will be required to comply with MTD requirements. For jointly owned property, each individual must make a digital record for their share of income and expenditure.

But HMRC defers MTD for individuals

The government's first report on MTD in 2015 pledged that by 2020 taxpayers "will be able to register, file, pay and update their information at any time of the day or night, and at any point in the year. For the vast majority there will be no need to fill in an annual tax return".

However, HMRC recently announced that to meet the likely requirements for increase customs paperwork (a predicted increase in certificates of origin from 50 million to 250 million a year) as a result of Brexit, HMRC will move resources from MTD for individuals to assist in the new Customs arrangements. So HMRC has deferred moving to MTD for individuals.

If you're an Enterprise Nation member and are concerned about whether your business record keeping will pass an HMRC investigation or you simply want to know more about the impact of Making Tax Digital, you can have a free advice session with an ICAEW Business Advice Service firm. You can find details of the ICAEW Business Advice Service firms here.

Clive Lewis
Clive LewisICAEW

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