As the competent authority, Her Majesty’s Revenue and Customs (HMRC) may for various reasons decide to investigate various aspects of your business to determine if there have been transgressions of any tax laws or regulations. This may not be as common for individuals and smaller business entities and thus many of you may not know why or how this process occurs.
Firstly, you may find yourself in the crosshairs of an HMRC investigation for several qualitative or quantitative reasons, as will be determined by HMRC from time to time. The most common among these reasons is:
Mistakes made on your tax returns (regularly)
HMRC may receive a tipoff
- Your yearly numbers may fluctuate above ‘normal’ margins
- Your business shows unprofitability for several years
Your expenses and earnings do not correlate to industry norms
Directors and management earning less than lower level employees
You have omitted to report income
These are just some of the reasons an investigation may be initiated, but any activity which may be perceived as suspicious can also place you under tax investigation, such as having any business dealings with companies or businesses which themselves may have been found guilty of tax crimes, or you may just have been randomly selected.
Irrespective of the reason, before the investigation gets underway, you will be notified in writing by the HMRC which will include a deadline for your response (usually 30-35 days). Depending on the level of investigation, various records will be requested which may include bank and credit card statements, cheque books and pay slips, vat records, pay records and other financial records as may be required. The time period required for the investigation similarly depends on the level of the investigation as well as other contributing factors. This is usually between 3 and 6 months for smaller investigations but can take around 16 months for full investigations.
You may additionally be required to meet with an investigator in person, during which you will be asked various questions pertaining to the history of the business, financial record keeping and controls as well as information which relates to income and expenditure. It is advisably in your best interest to be well prepared for all questions and to ensure the timely submissions of requested documents, to avoid any further delays or possible penalties.