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What to do if you’re investigated by HMRC

Date: Jun 23, 2022

What to do if you’re investigated by HMRC

How do you know it’s happening?

I’m sure it’s every business owner’s worst nightmare – the thought of a letter hitting the door mat with the tell-tale brown envelope with the letters HMRC on it!  Even more so when that letter opens with a sentence along the lines of “every year we check a number of returns to make sure they are correct and that the right amount of tax is being paid” ….  It could be any of the taxes from self-assessment / personal tax to corporation tax to VAT or PAYE/NIC.  And this year it’s your turn!! 

What does it involve?

We’ve had a couple of clients that have been subject to a compliance check (sounds less scary than “investigation”!) and can honestly say that as much as it was hard work and we had to drop everything to deal with it as the agent of our clients, the HMRC Officers leading each time were fair and understanding and “human”.  At the end of the day, they’re just doing their jobs.

When I say it was “hard work”, I simply mean that there was a sheer volume of information required related to whatever specific area it was that was being reviewed, as well as all the conversations about the business / questions arising from the review etc. 

Depending on the level of investigation, you can expect it to take between 2 and 6 months for a smaller enquiry, whereas a full-scale investigation could take up to 16-18 months!

Why me?

Some of the most common reasons for a compliance check or investigation are:

  • Your business operates in one of HMRC’s target areas or sectors
  • Errors or omissions which get flagged as an inconsistency or just look strange
  • You or your business has been deemed a risk or looks suspicious due to a trigger that has been flagged in the HMRC risk-based selection process
  • You’re just unlucky and it’s a random check!

For our client “Bob” (let’s say his name is!), it was all to do with travel, subsistence and uniform going through the sole trader accounts (and therefore self-assessment tax return) – areas that are often “grey” in terms of whether something is wholly allowable as business expenditure.  HMRC requested copies of all invoices / receipts / other documentation backing up the costs, as well as mileage records and even diary entries showing what meetings or events “Bob” was at to ensure they tied up to the business expenditure being claimed.

For another client “Betty” it was about pre-trading expenditure that she’d claimed VAT on which overall meant that her limited company would be receiving a large refund.  Perhaps not surprisingly, HMRC don’t always like giving money back to the taxpayer, so it was almost inevitable that the brown envelope hit our desks!

What happens in the end?

In the case of our clients, I’m pleased to say that at the end of the investigations (2 -3 months later!), the clients and us as their agents received a final closure notice concluding that the self-assessment tax return did not need to be amended and HMRC were happy with everything that had been claimed in the case of “Bob”, and the full VAT repayment was allowed with no amendment to the VAT return for “Betty”. 

It might not always be a happy ending though if you are found to have made mistakes (despite taking reasonable care or you have failed to take reasonable care), or deliberate omissions which have caused an underpayment of the amount of tax declared.  You are likely to receive a penalty in these cases as well as having to pay the additional tax due, and of course you will be on HMRC’s radar so they may decide to check back on you.

Conclusion

No-one wants to be investigated by HMRC, but if you keep efficient and accurate accounting records with all the supporting documentation in something like QuickBooks or Xero then you have everything to hand that you’re asked for. 

If you work with an accountant who knows what they’re doing and can answer all your questions about what you can and can’t claim through the business, then you’ll be fine as long as you listen to their advice! 

And finally, as long as you’re open and honest and helpful to the HMRC Officer assigned to your investigation, it can be a slightly onerous but otherwise painless experience!