15 October 2018
An inspector calls (Part Two)
In the second in our two-part blog about tax investigations, we consider why you might be selected, what the process could involve, and how to mitigate the risk of you becoming a target.
Why you might be selected for investigation
MTD, in providing more information, could lead to an increase in in-depth investigations. So small businesses will have to be more vigilant and attentive to the accuracy of their accounting records as they clearly are going to be more susceptible to being investigated. It is worth noting that the most common reasons why HMRC may start an enquiry are:
- Receiving a tip-off (which could be unfounded or malicious)
- Consistently reporting losses over a protracted period
- Margins which fall below the expected values for the industry sector
- Regular errors on returns
- Large fluctuations in trading results
- As a consequence of information obtained from an enquiry into an associated business, significant customer or supplier
- Submitting one’s own accounts without using an accountant, or using an accountant with a poor reputation
- Operating in a trade or profession that is subject to one of HMRC’s campaigns. (Campaigns that are currently live are credit card sales, second incomes and let property).
How investigations start – and finish
The first indication is the receipt of a notice of HMRC’s intention to carry out an investigation. The notice must normally be given by the first anniversary of the date on which the return was filed. However, HMRC’s enquiry window may be extended if the return was filed late or was amended. The notice normally arrives with a letter asking for the information that the inspector needs for the purpose of his enquiry. The letter will usually set a time limit for the submission of the information. Care needs to be exercised at this point because the inspector might request information that he is not entitled by statute to possess. On the other hand, refusal to supply such information could easily give rise to further suspicion. The most important point, however, is that if you receive such a notice you should do nothing before seeking professional advice, which, in the case of our clients, is your usual UHY partner.
The type of information that falls within the inspector’s statutory powers is normally the entirety of the business’s accounting records. This does not include the accountant’s working papers, although some information from these will usually be necessary for a better understanding of the accounts. In some cases, the inspector will ask to see a complete list of personal assets and try to reconcile personal wealth with reported income.
An in-depth investigation is usually challenging, time-consuming, worrying and frustrating, and involves tense interviews with HMRC and substantial professional fees. It can also be costly in other ways. If HMRC establishes that there has been an underpayment of tax, interest and penalties will be added to the amount of back tax you are obliged to pay. Expertise and experience are needed to negotiate the least costly outcome.
Reducing the risk
Small businesses can take steps to mitigate the risk of an investigation, or make it less likely to proceed beyond the first stage. Most obviously, ensure that your accounting records are complete and accurate. Use a reputable accountant; this won’t guarantee that you aren’t investigated but it reduces the chances. Take care to avoid becoming associated with unethical businesses or ‘dodgy’ deals. Don’t be tempted by artificial tax avoidance schemes. UHY Torgersens will never invite you to subscribe to any of these, but there are still some unscrupulous organisations that promote them.
You can subscribe to professional fee protection schemes offered by accountancy firms, which cover the professional fees involved in fighting an investigation case.
Finally, if you have any doubts over the adequacy of your accounting records, or over the legitimacy of any of your transactions, don’t hesitate to contact your usual UHY advisor.
As one of the leading firms of accountants in the North East, with offices in Newcastle, Sunderland and Jarrow, we have the expertise to advise you on a wide range of business and tax related issues. If you would like to speak to one of our local experts, please contact us.