How your Small Business can Survive a Tax Investigation

Nothing can rock a small business owner quite like the arrival of the dreaded brown envelope from HMRC. While it can bring good news, such as notification of a tax rebate, most business owners will share the view that the less they hear from HMRC, the better. One of the worst outcomes a business owner can expect is to learn that they are to be the subject of an HMRC tax enquiry.  

Most business owners will find this news extremely worrying, but before you panic, it pays to understand a little more about the process. It could be that you have been targeted completely at random, or that you have simply made an innocent mistake on your tax return. So, if your business is the subject of a tax return, this is what you should do to survive…

1. Understand why you are being investigated

Before you can start preparing for a tax investigation, you need to have a clear idea about why your business has been targeted. In the majority of cases, a business will usually be the subject of a tax investigation because HMRC believes there’s a high-risk tax is being understated, whether it’s deliberately or due to an innocent mistake. However, HMRC does still target some businesses at random, particularly those operating in sectors it believes present a high-risk.

The first contact you will usually receive from HMRC is a written notice explaining that you are either the subject of a tax enquiry, where information or documentation is sought, or that you are being inspected and a visit needs to be arranged. Details included in the letter will usually tell you why you have been targeted.

Common reasons for tax investigations include:

  • Your returns  don’t correlate with previous years
  • Your returns and payments have not been submitted on time
  • No reasons have been given for considerable differences from one year to the next
  • Expenses are unusually high
  • Cash transactions have not been properly accounted for
  • You have been involved in questionable tax planning activities 

2. Make sure time limits have not been exceeded

HMRC has a limited amount of time to commence an enquiry into a tax return. It has 12 months from the date the tax return was submitted to send you notice that an enquiry is to commence (different time limits apply if the tax return is amended or filed late). If the enquiry notice is not received within the statutory time limit, the tax enquiry cannot take place.  

3. Respond in a timely manner

If you have been asked to send HMRC information then you should do so in a timely manner. In some instances, it may ask for information which seems unreasonable, so check the legitimacy of those requests with your tax accountant. As this stage of the process, dragging your feet with information requests will not help. At the end of the investigation, HMRC considers your level of cooperation when determining any penalties, so needlessly delaying the process will not help.  

Once it has received the requested information, HMRC will review it (usually over a period of a couple of months) and consider whether the matter needs to be investigated further. If an investigation is launched, HMRC will request a meeting with you. At this stage, as a general rule, if you’re aware of any issues then you should make a full disclosure at the earliest opportunity.  

4. Don’t lie

HMRC probably already knows more than you might think. HMRC has a huge data bank to turn to for information from a wide range of sources. Lying will only prolong the investigation and reflect badly on you when it comes to determining appropriate penalties. If you know you have made a mistake on your tax return, be honest. A full disclosure could help to reduce the penalty you receive and the likelihood of a criminal investigation.  

5. Prepare for meetings

If you’re invited to attend a meeting by HMRC then ask for an agenda in advance and make sure you prepare. You should never attend a meeting without an adviser. You should also work with them beforehand to anticipate the questions you’re likely to be asked and prepare your answers.

Meetings are designed to catch you out, so take your time when answering the questions and ask for any clarification if required. You should also take notes of the meeting. The HMRC investigators will usually take their own notes which you can ask to see. If they contain details which you think are not an accurate reflection of the meeting, request that amendments are made as they may be used in court.   

6. Mitigate any penalties

If the investigation finds there has been any wrongdoing on your part, whether accidental or deliberate, then hopefully you’ll be able to reach an agreement with the investigators that is acceptable to both parties. However, it’s important to note that the investigators do not have the final say. If you disagree with their decision then you can take it to an independent tax tribunal or the higher courts.  

7. Don’t do it again!

HMRC does not look favourably on repeat offenders, so learn the lesson from this investigation and take more care in the future. Tax investigations are an experience most business owners find extremely stressful, so do everything you can to make sure it’s not one you repeat.