Simon Smith FCCAon the rise in HMRC tax investigations and why preparing your business for such a situation is wise planning.
Heed this warning, the taxman is more powerful than ever before and more likely to look into your financial affairs!
You might think that submitting your tax return on time and accurately is the end of the filing headache. Alas, don't be so sure...
As a business owner it’s easy to be in the mind-set that as long as you “cross all of the t’s and dot all of the i’s” then you're in the clear. That's only partly true. The reality is HM Revenue & Customs (HMRC) has been taking extra steps to make sure businesses are paying the right amount of tax, even if everything seems fine.
Sure you've filed your taxes properly but that doesn't mean you're out of HMRC's reach. They can launch an investigation at any time and you can be randomly selected for an enquiry. This is likely to be expensive and time consuming, especially if you appeal against a decision in their favour.
In this post we explain the importance of accurate record keeping, the need to understand tax, and the help available to prepare yourself in the event of a HMRC tax investigation.
Why tax investigations occur
HMRC is attempting to narrow the tax gap at every avenue. The tax gap is the difference between the amount of tax the UK actually collects compared to the tax that it could gather. This is so that revenues can be maximised to fund public services. Consequently, the number of investigations into SMEs has been on the rise.
According Anna Mikhailova, in the Telegraph, half a million small businesses were under investigation in 2018. She also reports that 46% of SMEs were cited by HMRC for the £34 billion in tax it failed to collect in the 2015/16 tax year.
Meanwhile David Prosser in MoneyWeek explains that in the 2016/17 tax year, tax investigations into SMEs yielded an extra £504m for the Exchequer. That's a rise of 8% on 2015/16.
So it's clear, the taxman has small businesses in his sights!
Why HMRC may have reason to investigate you:
You've made errors regularly on your tax returns
There has been a significant drop in margins between years
Inconsistency with industry earning standards
Questionable director's pay
Omission of income
Whilst the above are good reasons for a HMRC enquiry into your business affairs, a key point is you could be selected at random. That can happen even if your records are in good working order!
HMRC can look back up to 20 years in certain scenarios including cases where they suspect tax has been evaded. Their use of sophisticated software allows them to cross reference different sources of data relating to business income. This means they can identify inconsistencies from tax returns quite easily and launch investigations.
Here are 3 steps to help you prevent the likelihood of non-compliance:
You’ve heard it from us before! Keeping good accounting records is an essential aspect of running and managing an SME business. On a day-to-day basis good bookkeeping practices will keep your client and supplier relationships in a positive light and provide you with the required intelligence you need to make strategic business decisions.
If an investigation occurs, you'll have the ability to locate the necessary evidence that can demonstrate you've declared and paid the right amount of tax. The right online accounting software can potentially also help you with this.
2. Researching and understanding your tax obligations
Tax can be a complicated process for many SMEs. It’s important to know what your obligations are, the tax reliefs you qualify for, and what HMRC expects. How do you know if you’re paying the right amount if you're unsure how much you should be paying?
You can't wait for HMRC to inform you of your big mistake. That will get expensive in terms of an investigation and potential fines. For the same reasons underpaying taxes is a bad idea. Be sure to plan so that you have a very thorough understanding of your exact tax liabilities.
3. Obtaining professional assistance from an advisor
When in doubt, hire help! Finding the right advisor for your business finances will help save you time and money. Should you find yourself in the midst of a tax investigation, you’re advisor will be the person that helps you decipher what’s happening and then find a solution. They could be the difference between paying a significant fine and avoiding one!
The costs of an investigation
Undergoing a tax investigation is, as we've demonstrated, not a great situation to be in. Hiring an advisor is of course sensible. However, investigations by the Revenue are lengthy and this will be reflected in the work your accountant performs to protect you. The longer it goes on the more the professional fees will accumulate, sometimes amounting to thousands of pounds.
Cover the costs with investigation services
Another option is to purchase investigation services for a monthly or annual fee. This then ensures the cost of a potential enquiry will be covered. That way your accountant can help you defend your case as it's already paid for. Such forward planning can help prevent panic and provide you with peace of mind.
You may be thinking 'I keep great records and do everything by the book' or 'I have someone who handles all my paperwork so I should be fine'... the reality is that the rules can change, and that can affect even the most diligent tax paying business owners.
And YES, even we have found some of our clients in situations that require our assistance and luckily our fees were covered! So, ask yourself:
Would you be able to afford the extra costs on top of all your other business expenses?
The content of this post is up to date and relevant as at 10/10/2019.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.