Earlier this year HMRC announced new powers to investigate companies they suspect of evading taxes. Even if you have done everything right, HMRC can randomly select you for a tax inquiry.
It may be that the sector you work in is facing a lot of scrutiny, as is currently happening with companies selling electronic sale suppression systems. Or you may have filed your tax return late or it contained accidental errors.
Knowing why you are being investigated is the first step to understanding what the investigation will involve and how best to prepare.
Types of inquiry
- Random checks – as the name suggests, these inquiries can open into the affairs of any business at any time.
- Aspect inquiries – these are concerned with only some of the entries on your tax return and tend to be more targeted, for instance, challenging why specific items have been claimed.
- Full inquiries – if HMRC thinks that there is a strong chance your company has made a large-scale accountancy error or series of errors, they could look at all accounts, both business and personal.
Note that the first two inquiries can turn into full inquiries if HMRC find major inconsistencies or issues with your company accounts.
The investigative process
HMRC will contact you either by phone or letter, or through your accountant, to let you know of their intentions.
If at that stage you realise you have made a mistake it’s best to own up straightaway as HMRC will take your honesty into consideration. You will generally be given 30 days to reply to any requests for information. The quicker this is supplied the sooner HMRC will be able to reach a conclusion.
How far back the investigation goes will depend on what is being investigated. If HMRC believe the errors to be innocently made, they can look back four years. If they decide mistakes are the result of careless behaviour this can be extended to six years, except for VAT which is still four years.
If HMRC suspects there has been a deliberate tax evasion, they can request records going back twenty years.
The penalties
These come under different categories, depending on their seriousness and how the errors came about.
First, HMRC will apply a penalty based on whether you practised reasonable care in your tax affairs. If you are found to have been negligent, you can face a penalty of up to 30% of the extra tax due.
Next, HMRC will determine whether your mistake was a deliberate error. If you made no effort to conceal your fraudulence, the penalty can range from 20% to 70% of the tax owed. If you tried to hide the deliberate error, your penalty can range from 30% to 100%.
In cases where tax as been deliberately unpaid, HMRC have a contractual disclosure facility. This gives individuals (not companies) the chance to give a full disclosure in return for immunity from prosecution.
If you are concerned about a possible investigation or feel you may be heading for a penalty, remember it is always best to be open and honest and to respond to HMRC as quickly and efficiently as possible.