Undergoing a HMRC audit — or HMRC tax investigation — is something no business owner wants to experience. Not only are they incredibly stressful and worrying, they’re also incredibly time-consuming as a business owner must manage their side of the tax investigation, whilst also paying out on average £5,000 in accountancy fees.
There’s also more bad news. No business can totally eliminate the threat of a tax investigation, even if they’ve been adhering to all the rules. This is because sometimes HMRC tax investigations happen entirely at random. That’s right – the only reason could be that your business’ name was the one unfortunate enough to be picked from a hat.
Whilst little is known about what really triggers HMRC tax investigations, we’ve compiled a list of 6 of the well known tax inspection flags to avoid. Avoiding these triggers will ensure that if a tax investigation ever does happen – though it might be a stressful process – your business will simply go through a routine tax audit without having anything extra to worry about.
1. HMRC receives a tip-off.
If an anonymous tip off was the reason behind HMRC’s sudden arrival at your door, they will never give this as their reason, so you’d truly never know. However if there’s no other conceivable reason you could think of, it could be down to:
- A disgruntled ex-employee or ex-partner who is under the impression that there are tax evasion activities going on
- Your business is solely cash payments only, and this particular aspect of your business has aroused suspicion
- Your lifestyle appears to be beyond your means
- Your business operates in a high risk industry, like a bank or currency exchange, and there is regular money being exchanged between offshore bank accounts
Out of the above, justifying your lifestyle would be the most difficult to address, especially if the money you have been spending comes from sources of income that are not related to your business, such as a trust fund or inheritance.
Meanwhile a cash-only policy may appear harmless, but in today’s culture of card transactions and contactless payments following the Covid-19 pandemic, a cash-in-hand only business model raises the suspicions of both patrons and HM Revenue and Customs.
2. There are mistakes on your tax returns.
A one-off mistake is likely to be treated as careless, and a majority of the time HMRC will rectify this with you or your accountant in a series of quick checks, but if there are constant mistakes, or you regularly pay tax late they will become suspicious of your tax affairs.
Mistakes could include submitting inaccurate figures or year-on-year information, as well as any tax calculations on your Self Assessment tax return that HMRC suspects are designed to impact your tax affairs.
Find out the other simple tax mistakes business owners make
When submitting your tax records, make sure that they’re accurate, transparent and up to date. If you are doing your accounting independently, and you begin to receive frequent tax audits, it’s time to talk to an accountant and get your paperwork in line – pronto.
Check here to see if your limited company needs to hire an accountant.
3. Your numbers are fluctuating.
HMRC understands that businesses rarely pull in identical figures year-on-year. Sometimes there are financial booms, upturns and natural downturns, but if the difference between one year is substantially larger or smaller than the year before, it could lead to questions.
If your business has unfortunately experienced a huge drop in turnover, or excitedly received a huge upturn in profit, it’s best to keep on top of your tax affairs with regular, timely submissions of VAT returns that will help forewarn HMRC.
4. Your figures are inconsistent with industry standards.
Following on from our last point, HMRC has an incredible collection of data that works out on average what every single industry is earning year-on-year.
If your figures are substantially different from the average high earning business in your industry, HMRC may become suspicious. Hm Revenue and Customs will investigate income tax, capital gains tax, inheritance tax, corporation tax and VAT to name but a few.
If genuine circumstances have benefited you, don’t worry and continue being honest in your returns. Instead, just ensure that you have established yourself as the correct type of business. A limited company having a surge will look less suspicious than a sole trader, and vice versa.
5. You’ve never made a profit.
Whilst HMRC mostly expects your accountant to be a tax expert, if you are filing tax returns that show you have not turned a profit, but have remained in business for more than three or so years, investigators are going to become suspicious of how you are still managing to operate.
If it’s just a case of you having an unlucky run and a lot of investment behind you to float your business, you must make this clear with HMRC on the tax return and inform them of the reasons why you are failing, or struggling to tip that scale.
6. You do not have financial representation.
Accountants are vital to any business, not only for their work, advice and support that they can give to business owners, but they can also drastically reduce your chances of being investigated, simply by being involved in your financial paperwork.
A business owner managing their own finances could have many reasons for keeping those shielded from the eyes of HMRC, but by using an accredited accountant, this eases HMRC’s suspicions and helps boost trustworthiness.
If you are a small business owner independently managing your accounts, HMRC may launch an investigation anyway just to ease their own anxieties around business owners potentially making mistakes with paperwork simply due to inexperience. However, if you own a large corporation and you are still declaring yourself the sole proprietor of your financial paperwork, HMRC may also launch an investigation to understand why, so the best solution would be to get an accredited accountant on board, fast.
We hope these guidelines give you some insight into the world of HMRC audits. If you are a business owner juggling accountancy and the day-to-day running of your business, Raw Accounting is here to help you.
We’re a trusted accredited accounting firm who can take care of all elements of accounting and bookkeeping, and can even offer tax efficiency services, alongside any advice or guidance you may need. Book a quick call with us now and let us take the stress of accounting off of your shoulders.
