How small businesses can avoid unwarranted tax investigations

Lee Murphy looks at how businesses can file correctly in a way that eliminates the stress of a tax investigation.

The deadline for tax return submissions may have passed but, no sooner than one source of stress is put to bed, many businesses fret over another potential headache just around the corner.

Every year, HMRC carries out a number inspections of people’s tax affairs. As too many small businesses know, inspections are instigated when the revenue believes tax submissions are not in order, that some supplied data is inaccurate or when it believes a taxpayer is trying to pull the wool over its eyes.

The spectrum of avenues the taxman can follow are various, ranging from an automated letter requiring a corrected resubmission, to fishing expeditions aimed at industries deemed more at risk of tax evasion, to full-blown investigation in to historical tax affairs, requiring interviews, meetings, negotiations in a process that can take years.

Sanctions can range from a requirement to correct submissions, to a minor fine to a significant demand for backdated tax. It is imperative HMRC is able to collect the amount of tax it is due. But what all stages of its checks have in common is the stress, anxiety and sheer business disruption these inspections can cause. Investigation interviews can be very formal and abrasive, and tax inspectors have been known to pursue cases too aggressively to meet targets.

Believe me, every business owner should want to steer absolutely clear of the headache an inspection can induce. Knowing what is likely to raise a red flag is key to doing so. So, what do you need to know?

1. Ensure your info adds up

I don’t mean getting your maths right. HMRC’s checks are triggered by a mixture of largely algorithmic initial sifting, geared toward looking for data in submissions – or across government-held information – that just doesn’t tally up. So, if your PAYE income tax, as reported by an employer, differs from the amount you state in a self-assessment, that raises suspicion.

Consistency is key. The same applies to spikes and ratios. If you made a sudden out-sized expense purchase during one VAT quarter, it looks odd. If you gross profit ratio is significantly out of line with previous submissions, it may raise suspicion. I’m not saying you should let these facts drive your business planning or spending, but you should be aware of the effect they could have.

2. Be on time

Which of these people is more likely to have under-reported the tax they owe – someone who submitted ten months before deadline, or one who filed with just hours to spare?

It has long been suspected that HMRC weights timely submission and payment low in the ranks of cases requiring attention. Someone who submits on time is likely to be an organised taxpayer, whose books have fewer holes in them. So get prepared in good time, and file promptly – in these days of digital filing and online accounting tools to help out, there is little excuse.

3. Get professional help

If you are struggling to do your own books, if you are finding it a chore to make your tax filing deadline, you are more likely to make honest mistakes.

One of the best ways to avoid falling in to the inspection trap is to hire a professional to help. If you use an accountant or bookkeeper, you are more likely to have accurate records, and less likely to be investigated. Even if you do find yourself called up for an inspection of a messy, self-filed tax return, it is not too late to get help – many accountants are happy to advise at this stage, and many even specialise in steering investigations through to a satisfactory conclusion.

4. Be as compliant as possible

Even the tax man is not too cold-hearted to turn down a well-argued and accurate argument in your defence.

A HMRC inspection may be stressful, but it will be far less so if you can put forward a well-kept set of books in your defence. Doing so won’t just help if the worst happens – there are now many tools available to help business owners organise accurate information through the year. So give yourself the peace of mind and confidence to file your next tax return safe in the knowledge that, even if an over-zealous inspector calls, you have nothing to worry about.

Lee Murphy is owner of Pandle.

Further reading on tax

Ben Lobel

Ben Lobel

Ben Lobel was the editor of from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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Tax Returns

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