6 tips for avoiding an HMRC investigation
HMRC investigations are scary affairs. Sure, some might say, if you have nothing to hide then you shouldn’t be worried. But there is always the chance that you made an innocent, but costly mistake in the last six years of filing your taxes.
And besides, tax investigations can be time-consuming and expensive, especially if you employ an accountant to straighten out all of your affairs.
Around 7% of tax investigations are random, so you can never be sure about avoiding a scrape with the taxman, but there are some things you can do to reduce the risk of appearing in his crosshairs.
Avoid regular mistakes
Everyone makes mistakes. HMRC isn’t known for its generosity of spirit, but even the most austere HMRC investigator will recognise an occasional genuine mistake. But when multiple mistakes start adding up and are being repeated year in year out, that’s when the taxman gets a trickle of suspicion down his spine.
Routine mistakes will prompt investigators to ask how innocent the ‘mistakes’ really are and before you know it, you could owe the government thousands upon thousands of pounds.
The best way to avoid mistakes is to take your book keeping responsibilities seriously. Track all your incomings and expenses thoroughly and keep receipts as evidence.
Using a cloud-based accounting system can make this process easier. Giving you a virtual record of all your business transactions and letting you take photographs of receipts to keep as evidence.
Hire an accountant
We might be biased, but we think accountants are wonderful. They can help small business owners out in so many ways, but did you know they can also prevent you from being investigated by HMRC?
If you submit your taxes through a registered agent (an accountant) then it reduces the risk of your company being investigated.
HMRC sees having an accountant as a badge of trust for a company. They know that accountants have a responsibility to play by the rules and won’t risk their professional reputation to falsify returns.
Make sure your earnings are consistent with industry standards
HMRC may be many things. But one thing they are not is foolish.
Don’t forget that HMRC hold income data for near enough every single person in the country. They know, broadly, how much everyone earns and they have sophisticated algorithms that give them a pretty good idea how much you should be making.
If your earnings don’t stack up against what HMRC’s computer thinks you should be making then that will put a little red flag next to your company name.
Explain any big changes
If you pay tens of thousands of pounds of income tax in one year, and then practically nothing the next year, HMRC is going to grow suspicious.
In these circumstances, a HMRC investigator is faced with two possibilities. Either you haven’t earned as much this year compared with last, or you have engaged in some kind of tax evasion.
Either way, you will likely become the subject of an unwanted tax investigation, unless you provide the tax authority with some information that changes their mind.
When you file your taxes you should always leave notes so the taxman has a little bit of context. /Here you can explain any large jumps in turnover or gross profit - losing a major client, for example, or a long period of sickness.
Keep your enemies close
HMRC won’t admit it, but many of their investigations are sparked by tip-offs about dodgy tax practices.
These tip offs can come from anywhere, including disgruntled former employees and unhappy business partners. You might not be able to keep all of these people happy, but you should never give them a reason to doubt that all your tax affairs are above board.
Don’t operate ‘cash only’
Cash only businesses are a big red flag for the tax man. Out of practicality, many businesses are predominantly cash based, such as small construction companies and home maintenance operations.
The taxman puts companies in these industries under closer scrutiny and some of these businesses will be investigated more frequently than others.
But other businesses such as shops and restaurants that operate a ‘cash only’ policy will set alarm bells ringing for HMRC.