HMRC Tax Investigations and how to survive them

Q. Why is he dressed like a police officer? A. Shhhh act normal...

HMRC can open an investigation into your tax affairs at anytime, and can request to go back up to 20 years (although it is normally no later than 6 years). When you receive a letter stating HMRC are pending an investigation, it can be a very tense and stressful time even if you have done nothing wrong.

Investigations can occur for a variety of reasons. The most frequent is an obvious mistake that HMRC can see whilst looking through the information you have submitted to them. The mistake can be on any scale of seriousness so should not be taken lightly. If you spot a mistake and tell HMRC about it, they will still have to open an investigation still but it will be less severe and strict. Sometimes, a business selected for an investigation is totally random, HMRC will pick a few businesses in an area, maybe that are tax-fraud hotspots, just to make sure there is no tax evasion going on. HMRC are also the epitome of suspicious. If your sales figure has gone drastically up or down from one year to the next or are hugely different to the industry average, they will look into why this is.

The letter from HMRC will normally have clues on it as to why you are being investigated. It will also detail what direction the investigation will be taking. When you receive this letter, the emphasis is to act fast as if you do not have all the required information ready and at hand when the investigation starts, you will be seen as unorganised.

HMRC have the ability to request information from third-parties such as banks and other businesses. This is the extreme as normally they will look for co-operation, from the person being investigated, which will not only speed the whole process, but reduce any fines or penalties incurred. This can be just allowing them access to your files or it could be letting them interview you for a day. If you have made clear and obvious mistakes but do not allow HMRC access to your documents, the fine can be doubled, making it much worse for you.

The effect of not co-operating on your business is as follows:

1. The cost of the fine; which has no limit.
2. The cost of lost business and income whilst the investigation is going on. You could even be called for a police-style interview for a few days.
3. The bad publicity of tax evasion being hung over your business. This could lose potential and current suppliers or clients.
4. You will find it harder to get loans or funding from external sources. This is seen as deliberate avoidance of payment which is not the type of business they want to give a loan to. If you struggle to pay the fine, it can affect your credit rating too.

The general trend is that it is at this stage people will go and ask for professional help. The best people to see are tax accountants such as Tax Affinity Accountants who can help in various ways with the investigation. Some are below:

• Prepare you for the situation likely to be faced. Tax Accountants have gone through this process before and have seen clients both be let off and be found culpable. Tax Accountants are able to give advice on what type of thing you should say, how the investigation will pan out and what will happen if you get called for an interview. If this happens, you can be “warmed up” with some questions that HMRC will ask you and warned of the potentially probing questions they could ask to try and get what they want to hear from you.
• Collating information relevant to the investigation and ensuring only relevant information is provided to HMRC. This is where it is better to be using a Tax Accountancy firm already for your returns and accounts as they can provide you with all the information related to your investigation. Some people try to take everything they have (including receipts from shops and payslips) to investigations which are simply not needed. If you take everything, it can often dilute your argument as you are trying to argue over small details and take a long time trying to find the document in question.
• Dealing with any request by HMRC for further information. Sometimes HMRC will require more information for their investigation. However, sometimes this is a trick to try and get you to admit to what you did wrong or what you are covering up. A Tax Accountant will be able to distinguish between what is a genuine request and what is a ploy. They will also be able to provide a rapid turnaround for any information required by HMRC as all terms and requests will be understood rather than potentially misinterpreted by someone on their own making the situation look more suspicious or that they are not co-operating.
• Keeping the investigation to the point. Similar to the above, sometimes HMRC will see if there are any leads to other investigations they could do during this time. They might try to test other things which might not be picked up on by a person doing it alone. A Tax Accountant will make sure HMRC are only investigating what they said in their initial investigation letter.
• Negotiations with HMRC regarding penalties and potential interest. A Tax Accountant is in a better position to try and negotiate with HMRC over any penalty or fine imposed. People trying this on their own often get confused by the complicated HMRC phone system so end up at the wrong person.
• Creating a mutually beneficial pay arrangement between the parties. If a fine is levied against the business, if it is too large to pay at once, or if the business has a poor cash flow position at that date, a Tax Accountant can act as a third-party to try and create a suitable payment plan. This can often avoid the interest charges that HMRC try adding to the fine.

Even when the investigation has finished, there is no guarantee that you will not be investigated again. If you were randomly investigated one year and then the next year your profit figure increased dramatically, you could well actually be at risk of being investigated again. HMRC will not take to kindly either if you have already been found to be responsible in a previous investigation and then continue to make mistakes in subsequent years.

This blog might seem all doom and gloom but regulations are in place for the amount of tax that should be paid by either businesses or individuals. HMRC just apply this regulation as it would be unfair for some people to get away with not paying enough tax. If you have done nothing wrong, or even make an innocent mistake, HMRC will not be aggressive or disruptive. If you co-operative with them, they will ensure the investigation is as pain free for you as possible.

A Tax Accountant’s expertise and experience will help you greatly both financially and emotionally. As the fees that you may have to pay will be far outweighed by the amount of tax saved in direct negotiations with HMRC.

They know what the situation is and what the next move by HMRC will probably be. This means that anything unusual going on by HMRC will be noticed and prevents you from submitting too much information or making the investigation drag on longer than it should. The key is to co-operate with both your Tax Accountant and HMRC so the investigation is over quickly and as

By Owen Cain at Tax Affinity Accountants

Tax Affinity Accountants are experts in Tax and Accountancy. Based in Kingston upon Thames they are considered to be experts in all types of Accounting and Tax issues. Helping and supporting businesses and individuals throughout the UK.

For more information visit www.taxaffinity.com. To read more interesting articles like this visit www.taxaffinity.com/blog. Please feel free to comment and share this with your friends.