5 stages of tax investigations

Nov 7, 2023 | Blog

No business wants to be subject to tax investigations. It can cause disruption and stress and leave you with little time for your business.

Remember, though, that an investigation from HMRC doesn’t necessarily mean you’ve done anything wrong. Not every call is about criminal investigations – if you’re selected at random, HMRC can ask to look at your affairs, regardless of how good your records are.

So if HMRC calls, it’s best to know what to expect and to be aware of your role within the process.

In this article, we break down the five stages of an HMRC investigation to prepare you for any eventuality.

Tax investigations: What to expect

1. Record-keeping

HMRC isn’t technically involved at this stage, but any future tax investigations can be made much easier to handle, simply by doing your due diligence.

Keeping accurate and up-to-date records showing your expenditure, profits, and losses as accurately as possible, gives HMRC no reason to find anything that shouldn’t be there.

We’d always advise using modern cloud accounting software to help you do this, and to ask for advice if you’re not sure about whether or not you can claim for something.

For example, if a business expense doesn’t match HMRC’s criteria, it’s best not to try and claim for it. Most accounting software has compliance checks built in, which give you pointers as to when something may not match up.

By maintaining good records, you can also clearly see where you have unpaid taxes, and you’ll ensure you’re paying the right amount every time.

And going back and checking your records is a time-consuming process – it’s not worth it when, by building good business habits from the start, you could have kept your tax affairs in good order from day one.

2. Inspection

In the event of an inspection, HMRC will write or phone to say what they want to check. This could be for:

  • any taxes you pay
  • accounts and tax calculations
  • your Self Assessment tax return
  • your Company Tax Return
  • PAYE records and returns, if you employ people.

If you use an accountant (like us), HMRC will contact them instead.

To authorise someone to act on your behalf, you’ll need to write to HMRC and tell them who you want to use.

During the inspection, HMRC may ask to visit your home, business or an adviser’s office, or ask you to visit them. You can request that an accountant or adviser is present during their visit.

If HMRC sends you an inspection or information notice, and you don’t respond or refuse a visit, you may be fined. You will not have to pay a penalty if you have a reasonable excuse, for example:

  • you’re seriously ill
  • you’ve been recently bereaved

If you have a reason for them not to check, you need to respond to tell HMRC to stop their inquiry. This is an unusual situation, but worth noting should something happen.

And if you disagree with the reasoning behind HMRC’s check, you’ll need to apply for an alternative dispute resolution (ADR).

3. Receiving the results

Once they’ve finished reviewing your information, HMRC will write to tell you their findings. Their investigation processes depend on what they’re looking at, but you’ll usually be:

repaid if you’ve paid too much – you may also get interest on the amounts of tax you’re owed
asked to pay additional tax within 30 days if you owe more – you’ll normally have to pay interest from the date the tax was due.

You may also need to pay a penalty. HMRC will look at:

  • the reasons why you underpaid or overclaimed the tax
  • whether you told HMRC as soon as you could
  • how helpful you’ve been during the check.

If you have problems paying, make sure you let the HMRC officer who you’ve been dealing with know as soon as possible.

4. Pay or appeal

When you receive these results, you have two options: accept and pay/receive any tax owed or appeal the decision.

HMRC will send you a decision letter. You’ll then have to pay any tax owed. If you’re due a rebate, you’ll receive this from HMRC – time limits for this can vary.

You can appeal against some decisions:

  • your tax bill (for example Income Tax, Corporation Tax, VAT)
    a claim for tax relief
  • a request for information or to check your business records
  • a penalty (for example, if you paid your tax late or filed your tax return late).

As the person who looks after your taxes, your accountant will be responsible for making your appeal and will take you through the necessary steps to create it.

You’ll usually have to pay your costs as part of the appeal and can normally delay any payments or tax owed until the appeals have been resolved.

5. Await the final verdict

As with any case, the length of time it takes is very dependent on the appeal itself. However, the more experienced the team working on your appeal, the faster it will be to go through each stage of your tax dispute.

We’re experts at dealing with HMRC tax investigations – sometimes you’re just unlucky and find yourself subject to one despite having squeaky-clean books. HMRC can request an investigation anytime, so don’t take it to heart.

Our tax investigation service uses a dedicated dispute resolution team to help you through each part of the process, giving you peace of mind wherever we can.

Get in touch with us to prepare for potential tax investigations.

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