Finding out that you’re going to have a tax investigation can come as a shock, especially if you weren’t aware that you’d done anything wrong. In fact, as some investigations are carried out at random you may not have done anything wrong at all.
If you’ve never been involved in a tax investigation before it can be daunting trying to understand the jargon, getting to grips with the HRMC investigation process, and just keeping calm and staying cooperative.
Here is a brief rundown of everything you need to know about a tax investigation so you know what to expect when Mr Taxman comes knocking.
Why am I being investigated?
As we explained in the introduction as many as 3% of investigations are carried out at random, so don’t automatically assume you’ve done something wrong if you get investigated.
Other reasons for the taxman visiting are: running a business in a high risk sector, HRMC being tipped off, poor record keeping, unusual information on the database, unexplained fluctuations in your account, using round numbers in every box on your tax return, or more complex issues such as non-domicile status.
What happens if I am chosen?
Tax inspectors choose their own cases and after you have been chosen your account will be looked at so that the inspector can gain further clues to your tax activity.
The taxpayer is reviewed in depth and then is assessed on their chance of becoming a ‘good result’ for the inspector. You will then be sent a letter informing you of the investigation and requesting all your business records for the previous 12 months.
This is the time to get independent, professional financial advice. Don’t trust what your mates down the pub or at golf tell you about the taxman!
After receiving the letter and providing your records the inspector will review them and then request an interview with you. Be prepared for this to take anywhere between two and four hours and to find the process very stressful.
You will be asked questions about your records and your business to highlight any issues the inspector may have and to confirm they correctly understand your records.
It didn’t go well. What now?
If unfortunately things don’t go well and errors are found in your records then your inspector will calculate the ‘uplift’ and add it to your account.
The inspector may also consider your records for other years and any interest or penalties you may have. This is where tax investigations become very expensive, not to mention stressful, for you and your business.
What about IR35 investigations?
An inspector will use your invoices to establish how many clients you have. If it is between one and two then this may lead to an IR35 investigation.
They might discuss their findings with Revenue auditors to decide whether to undertake an investigation of your main client in order to discover other clients, or ‘disguised employees’, that you haven’t declared.
Author: By Harry Price; Harry Price writes on all aspects of modern day life and the trials of dealing with the Tax man.