When people enquire as to why a tax Investigation is started in relation to their business, the answer can be a little bit vague, more than often leading to the answer, ‘because they can.’ However, to truly understand as to why the HMRC would start a tax enquiry in relation to your income does take some understanding of how the HMRC operates. While any business can be invited to a tax enquiry, the emphasis will evidently lay where there are some inconsistencies with the information being relayed to HMRC via Year End accounts or a tax return.
Now let’s be clear, a majority of business owners run their business as they should, and could still be liable to a tax enquiry. This isn’t to say that anything underhand has been going on, but is merely ‘the luck of the draw.’ While it’s untrue to say that any kind of tax enquiry isn’t worrying, those who have their accounts in order will evidently haves less to worry about.
However, there can be ‘triggers’ that look to flag your business or current financial setup, which could mean that a tax enquiry is carried out. For example, a business may have received some information about your business via third-party, and will use this investigation to see if such claims are upheld or not. Regardless of the outcome, it can still be a worrying prospect.
There can be a number of reasons as to how the HMRC gets the information, and you would actually be surprised what can lead to a certain business or individual being reported. In some instances, it can be as easy as a self-employed individual showing off his latest high-end purchases on social media, despite telling the HRMC that very little profit was made in the current tax year. Other instances can be because a business has chosen to keep two sets of accounts, one for the HMRC, and one with the genuine income. While there may be benefits to telling the HRMC, a business earns less than it does, it is illegal, and can open a business to more problems moving forward.
For example, if a business is for sale, then the records meant for the HMRC are unlikely to make the desired impact when it comes selling the business, so of course, the potential buyer will only want to see the profit a business is making, and not what is being reported to the HMRC. As such, the showing of such records means that it’s only a matter of time before the tax man comes knocking to make an enquiry at the very least.
HMRC Uses Sophisticated Cross-Checking Algorithms
The word algorithm can cause much confusion, but in layman’s terms, it can be seen as a form of artificial intelligence. The best example of this can be seen on social networks such as Facebook. When you browse the site, you will often be met with products that suit your tastes, while being introduced to people you may know. This is done using the information that is entered by ourselves, as well as several other behaviours.
While a completely different software algorithm is used within the HMRC, it does a lot of the same cross-checking a social network site would, albeit from a different perspective. So, what kind of things does the software look out for? While we can hasten a guess on many levels, no one truly knows, otherwise the concept would be open to misuse. However, it will be familiar with certain guidelines when it comes to certain aspects of a business’s financial standing. For example, there may be a business that is claiming certain expenses, but some of the figures are being flagged by Connect, the software that the HMRC uses, as part of its many cross-referencing checks.
If the HMRC feels like there could be inconsistencies, or it’s merely looking to ensure that its records are correct, then it could mean that any number of businesses could be subjected to a tax enquiry.
Other Possible Ramifications
While a vast number of businesses will work to ensure that they are operating in the right way, there will be a lot of self-employed individuals that will look to benefit by stating that they learn less than they actually do. As such, this can mean that they could be in receipt of other benefits, depending on the figures being provided to the HMRC.
This could mean that if a household receives benefits, such as Housing Benefit or Working Tax Credits, those in receipt could be receiving more than they are entitled to. As well as owing taxes on undeclared income, you could find that you find that you have more to worry about when it comes to certain sectors looking to recoup their money. As such, putting forward figures that are untrue could cause you more financial problems in the long run.
How Do I Know If My Accounts Are in Order?
Of course, not all of us may realise that we’re actually doing anything wrong. This can be because we’ve misunderstood an element of bookkeeping, or we’ve merely been given some bad advice when it comes to dealing with our finances. However, should an irregularity arise and we’ve not got an official accountant dealing with such tasks, then it’s likely the buck will sit with the business owner. Of course, a business owner may not know what to look out for when it comes to irregularities, and the prospect of them getting the accounts in order can be a stressful and time-consuming endeavour.
Whether you’re looking to start a business, or you’re looking to get your current accounts in order, it can be worthwhile investing in the services of a reputable accountant. Evidently, many can assume that the hiring of an accountant is a costly endeavour, but being able to avoid the ramifications that HMRC inspection could bring is at least worth considering.
What Can a Professional Accountant Bring to the Table
With regards to a tax enquiry, an account can bring a lot of value to your business, and it doesn’t have to cost as much as you’d think. When it comes help and advice, an account can offer a lot of advice on what kind of records you should be keeping, as well as what kind of paperwork needs to be submitted.
Should you be part of an investigation, an accountant will already know as to what inconsistencies there are, and they will have already been dealt with. If an accountant looks at your accounts when an investigation is taking place, then they will be able to peruse your records and make you aware of any problems
Having an accountant on board sooner rather than later can ensure that your accounts are kept up to date at all times. So even if you are subjected to an investigation, it doesn’t have to be a worrying endeavour, as you can be confident that all your records are up to date.
Many will assume then when it comes to informing the HMRC about income, the fact they have recorded it on their year-end accounts of self-assessment is all they need to do. However, there can be several factors to consider in this regard, depending on how we maintain our accounts.
For example, some sole-traders may have received some income into a personal account initially, so it ca mean that business and personal income has to be separated. If we’re not able to decipher between financial gifts and business income, then it’s likely we will be charged tax on the whole amount.
Knowing How to Deal with a Tax Enquiry
While we can ensure that our records are in order, the thought of a tax enquiry can be more worrying for some than others, so knowing how to handle an enquiry can ensure that you’re in the best position to answer any questions the HMRC may have.
Stay Calm: While this can be easier said than done, we must ensure that we can compose ourselves in such instances. From here, we must then determine what needs to be done in order to prepare us for our tax enquiry. If we don’t already have a professional on the side, then we should look to find one as possible. Not only will they be able to point out any errors with your accounts, but will also have experience in dealing with tax enquiries as a whole.
Don’t Hide the Evidence: While many can look to evade the taxman purposely, there are also many of us who never meant to do anything wrong, and it was merely down to an oversight or forgetting to make a note. While it can be tempting to conveniently lose such documentation, it may just give the HMRC the impression that we have more to hide. As such, you should look to seek information from an accountant as to how we should best deal with such situations.
Seek Clarification When You’re Unsure: To some, a tax enquiry can seem like a witch hunt, but it’s important not to blow this out of proportion. The HMRC will often know the difference between a mistake and knowingly avoiding the declaration of certain sums. Just as you are duty bound to tell them details in relation to your accounts, those investigating are also duty bound to ensure that if you have any questions or queries. Remember, both parties are looking for a satisfactory outcome here, so it makes sense to work with one another rather than against each other.
Don’t Make False Promises: Some enquiries may arise because some people have missed certain deadlines, and again, there doesn’t have to be anything untoward here, it can just mean that we’re unrealistic when it comes to ironing out certain issues. As already stated, there could be tax owed simply because we didn’t understand or forgot something. However, it’s vital that we offer a realistic payment plan that we’re able to meet, as missing further deadlines could mean further financial implications down the line.
Prepare Thoroughly for Meetings: Just because you have nothing to hide doesn’t mean that you shouldn’t prepare for a meeting like you would any other. As such, ensure you have as much paperwork to hand as possible and ensure you speak to your accountant to ensure that there is nothing out of place or missing when it comes to your business accounts. This means that the meeting will be less stressful and time-consuming as a result.
As you can see, the prospect of a tax enquiry can actually seem more worrying that it actually is, as long as we have out financial records in order. However, it’s still worth noting that a tax enquiry can be very time-consuming if we don’t have all records to hand. This is why having a professional on side is vital, remember, there are three scenarios that can occur that prompts a tax enquiry.
The first is purely due to pot-luck. It foes happen, so no business or entity should assume that they will never be part of a tax enquiry. The second is that the HMRC have received a tip-off. There can be many scenarios in which this occurs, often attributed to our online presence as well as our business. If someone smells a rat when it comes to your financial affairs, then it could mean that it isn’t long before the HMRC is in touch.
The third and final prompt can be an inconsistency in relation to information being relayed to different sectors. For example, the Connect software used by the HMRC may have noticed some irregularities between your VAT returns and your business’s year-end accounts.
As such, it makes sense to keep your accounts under the assumption that a tax enquiry could happen at any time, which is why having a professional take care of such matters is always advised.
We at The Accountancy Solutions, specialize in Tax investigations. If you have received a letter from HMRC regarding a tax inquiry or investigation for PAYE, Income Tax, VAT, Capital Gains Tax or Corporation Tax call our office on 01216297768 or 02070784001 for a free, no obligation and confidential advice.