The UK’s tax gap stands at an estimated £31 billion, with 4.7% accounted for in the form of tax liabilities, according to a HMRC report released in 2020. This figure represents the disparity in the amount that the HMRC should receive and the actual amount paid in taxes. While some tax goes unpaid due to lack of care and basic errors, evasion and avoidance continue to be significant issues.

It’s little wonder that HMRC continue to carry out in-depth investigations of the taxes paid (or unpaid) across the UK. However, there’s little reason for concern over such investigations, provided that you follow the recommended accounting procedures and have a professional accountant in place. Keep on reading as we present the essential tax investigation facts and advised steps for the preparation of your accounts and tax returns.

What happens during a tax investigation?

The tax investigation will involve a review of filed accounts and accompanying tax return to ensure that the right figures have been included and the correct amount of tax has been paid. The HMRC will provide notification of such a review by letter.

The investigation may focus on:

• The tax that you pay
• Your accounts and tax calculations
• Your Self Assessment tax return for a given year
• Your Company Tax Return, if you’re trading as a Limited Company
• Your PAYE records and returns if you’re an employer
• Your VAT returns and records if you’re VAT-registered

Requests for such information may also be sent to your accountant. However, you can expect prompt follow-up contact, with details of the impending investigation. It might be necessary to undertake a review of your paper-based or digital records.

HMRC will look to arrange an initial meeting, in your home, workplace, or advisor’s office. You may opt to have an accountant or legal advisor with you during the visit. A penalty may be issued if you refuse the meeting without reasonable excuse (such as being seriously ill or having a close relative die).

The depth of the financial analysis will vary, depending on why it is being carried out. You will be told whether the focus will be upon an element of a filed tax return or your wider financial affairs. The entire process may take anywhere between 3 and 16 months, depending on the scope of the investigation.

HMRC will notify you of the results of the investigation in writing. You can expect to be repaid if found to have paid too much tax, including any interest on the amount that you’re owed. Alternatively, HMRC may demand that you pay any owed tax within 30 days. In such an event you’ll have to pay interest from the date the tax was originally due.

A penalty might also have to be paid, depending on the following factors:

• The reasons why you underpaid or over-claimed the tax
• Whether you told HMRC as soon as you could
• How helpful you’ve been during the check.

What is the tax investigation time limit?

HMRC will typically carry out a review of accounts and tax submissions covering four years up to the date of the investigation. However, this may be extended to twenty years given evidence of mistakes or deliberate wrongdoing.

You could be issued with a fine or asked to make a payment covering taxes that went unpaid during the corresponding period. However, there will be the option of appealing if you don’t agree with the result of the investigation.

Further legal action may be taken and penalties imposed in the following instances:

• A mistake being made (despite taking reasonable care)
• The failure to take reasonable care, leading to a mistake
• The identification of deliberate omissions (whether or not they were purposely concealed).

You can expect HMRC to make follow-up contact and arrange a further investigation to see whether you’ve set your finances in order.

Why might you be subject to a tax investigation?

There are various reasons for the undertaking of tax investigations and it shouldn’t be assumed that HMRC suspect you of any wrongdoing. Indeed, investigations are often carried out on a random basis, ensuring a wide representative sample of UK taxpayers.

Having said that, a large number of investigations follow third-party reports of illegitimate financial activity. Significant changes in the amounts of tax filed by your business can also arouse the suspicion of HMRC. Other common reasons include reported years of unprofitability, omission of income, and the lack of a reputable accountant.

How should you prepare for a tax investigation?

It is essential that you allocate sufficient time and resources in preparation for the tax investigation. Money will ideally be set aside to cover any loss made as a result of the disruption to your usual business activities. You may consider the option of employing staff on a temporary basis or turning some work away if you feel that the pressure is going to be too great. It would also be worth calling on the services of a dedicated accountant.

It is advisable to collect financial records stretching back a number of years, given the potential scope of the investigation. Such records should be readily available in case they are demanded by the tax inspector.

If you have any concerns over your tax history or are preparing for a tax investigation then you should get in touch with the Appleleaf Chartered Certified Accountants. We will be happy to answer your questions and provide the individual support needed to keep your finances on track.