How to Prepare your Business for Tax Investigation

The yearly tax bill is quite intimidating as it is, the word investigation certainly does little to make it sound more approachable. The process through which HMRC decides which business to target for tax investigations can often lead to random selections. It is not uncommon for even the most cautious and prudent minds to feel a little uneasy at even the thought of HRMC going through each page of their finances.

How to Prepare your Business for Tax Investigation

But worrying about an impending investigation seldom helps. What does help is preparation. A tax investigation conducted by Her Majesty's Revenue and Customs is essentially a financial audit. It is a thorough evaluation of your business's numbers with the express purpose of ascertaining whether you have paid the right amount of tax.

Whatever the reason behind an investigation or the extent to which it is planned, it always helps to have professional representation. At Lawrence Grant, we pride ourselves on offering specialist HMRC Tax inquiry services. We support our clients during investigations with the highest quality of guidance and support.

What do Tax Investigators look for?

If you know what the investigators are looking for, it certainly helps to speed up the process if they are given that information promptly and without any hindrance. Investigators generally look to determine whether your business:

  • Has declared all of its income
  • is eligible to receive the deductions and credits it has claimed
  • has collected and reported the correct PAYE amounts
  • Is complying with other tax-related requirements

All these are maintained in documents such as sales invoices, purchase receipts, and other financial records. Since HMRC has access to your financial records because you submit them every year, their systems can easily detect irregularities which can often trigger an investigation.

Preparing Before You are Selected for an Investigation

There is no reason to wait till you are contacted by HMRC to start preparing. We can confidently say that it would be a best practice to ensure your business is always prepared to withstand a tax investigation.

Ensuring Records are Accurate, Up-to-date, and Accessible

These include details of your purchases, your sales, leases, and other payments. These also include PAYE records, bills, VAT records, tax credit claims, and other deductions your business has claimed in the past.

Accuracy is a requirement for smooth business operations anyway, but it becomes even more important in the event of an investigation. Accurate records reduce the need for deeper audits, make sense when cross-referenced, and make your business's affairs appear in order.

Up-to-date records can significantly reduce the time investigators spend looking for information, which can command confidence and can result in speedy conclusions to tax investigations.

The sooner HMRC receives the information they need, the sooner they can begin the investigation and conclude it. Being able to furnish required documents shows that your affairs are in order, transparent, and structured, all of which make your case stronger.

Filing Orderly and Accurate Tax Returns

One of the prime sources that can trigger an investigation is your tax returns. These include both the income tax returns and the VAT returns. Make sure that whoever is responsible for filing your returns is competent and has access to the correct financial information. If you file these yourself, having them checked by an expert accountant can go a long way towards reducing the chances of getting investigated.

Managing tax can get a lot easier if you take expert advice consistently. This is especially true if your business has to file VAT returns as these can often get a little complicated.

Maintaining Documents going back 7 Years

Tax investigation usually starts from your previous year's return. But they can go further back if they detect irregularities, such as a net-loss declaration by your business. You will be required to provide evidence for your claims and investigators can ask to see up to 6 years of records in some cases.

The investigation will become a lot easier to manage if the evidence has been maintained properly and is available when required.

Conducting Internal Audits

We recommend all businesses that fall in the medium to large category conduct regular internal audits. Since a Tax Investigation is also a financial audit, an internal audit can highlight discrepancies, errors, and irregularities before HMRC does.

If an internal audit does uncover information that is inaccurate or missing, you should report it to HMRC voluntarily. Voluntary disclosure strengthens your business's image as an entity that has taken all reasonable precautions to pay the correct amount of tax. 

Preparing After you been Notified

The amount of preparation you should undertake depends a lot on whether or not you are guilty of tax evasion. In most cases, however, an HMRC Tax Investigation is not something you should overly stress about. To remain equipped with the resources needed to handle a tax investigation, there are certain steps you can take.

  1. The first thing to do after getting notified is to speak to your accountant. If you have been performing accountant duties yourself, consider going over your methods of record-keeping at this stage.
  2. The next step is to ascertain whether the person in charge of accounts can furnish all the information HMRC requires. HMRC will inform you of what they need.
  3. There should ideally be one point of contact who liaises with HMRC during the course of the investigation. This can be your accountant or a Tax Enquiry Specialist. We would be happy to represent you if your business is under investigation.

Lawrence Grant are HMRC Tax Investigation Specialists. We understand how these investigations work, what exactly investigators are looking for, and how to ensure a speedy and fair conclusion.

We can guide you and your business through the investigation process and represent your business in front of HMRC by being the main point of contact. Please get in touch if you have received a letter from HMRC or if you are interested in preparing for a Tax Investigation.

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