There are few things business owners dread more than being on the receiving end of an HMRC tax investigation. But the situation may not be quite as stressful as you might think.
How does an investigation start?
The good news is that HMRC will generally give you notice that your business is being investigated, and in fact, the likelihood that investigating officers will turn up at your door unannounced is very slim.
Usually, the first contact you will receive from HMRC is an information notice. This is a straightforward request to provide information so that your business’s tax liability can be properly assessed.
If you respond to the information request within the time limit detailed on the notice and everything is deemed to be satisfactory then the investigation will not go any further. However, that’s not always the case.
If you are on the receiving end of an HMRC tax investigation then here’s what you should do…
Keep a cool head
The initial reaction of most business owners is to be angry or fearful and want to resolve the issue as quickly as they can. However, you should resist the temptation to call HMRC immediately. Instead, contact your accountant (if they have experience of tax investigations) or get in touch with a tax specialist to discuss what you should do next.
Have an honest conversation
There’s no point seeking professional advice if you’re not going to be completely honest about any errors you may be aware of. Only then will they be able to advise you on your best course of action given their knowledge of the subtleties of the HMRC tax investigation process.
Check HMRC is entitled to request certain information
Check with a specialist that HMRC is entitled to ask for the documentation it wants to see before responding to the initial information request. If you’re not sure why HMRC wants certain information then ask. If it’s not relevant to your tax return then it should not be provided.
Meet HMRC’s deadlines
HMRC will often suggest deadlines for certain information or responses to be provided. If the deadlines are reasonable then you should make sure you meet them as your cooperation will be taken into account when it comes to determining any penalties.
Due to internal pressure, HMRC may not always set reasonable deadlines. If you are unable to provide the information requested within the deadline then you should contact HMRC immediately.
Tell the truth
You should always tell the truth in your dealings with HMRC. HMRC has developed a ‘super computer’ called Connect which gives it access to a broad range of information about property, assets, bank accounts and much more. That means there’s a good chance it knows more than it’s letting on.
When it comes to penalties, the difference between disclosing any issues immediately and trying to conceal or deny errors can be huge, so think carefully about how you respond.
It is not unusual for HMRC to suggest a meeting in the early stages of a tax enquiry. However, in a routine investigation, there is no obligation to attend. Instead, you should inform HMRC that you will not be attending the meeting but will still cooperate in full.
If you are open to attending a meeting then you should ask the investigating officer for a detailed agenda of the items they want to cover beforehand. You should go through this agenda with your advisor (who should also attend the meeting with you) and think about the questions you’re likely to be asked and prepare your answers. You should also take notes of everything that’s said.
Consider the potential penalties
It’s advisable to keep the potential penalties in mind as everything you say from the moment you start corresponding with HMRC could impact the outcome of the investigation.
If you have made a silly but innocent mistake and have done everything you can to put the mistake right then you may not receive a penalty and will only have to pay the tax you owe. If you are charged a penalty then it’s likely to be around 15% of the tax due.
If you have made a deliberate error and not taken reasonable care to make sure your tax return is correct then you could receive a penalty of up to 70% of the amount due.
Make payments on account
If you do owe tax to HMRC then it might be possible to reach a payment agreement. Some advisers are specialists when it comes to negotiating payment agreements with HMRC. They could reach a ‘Time to Pay’ arrangement on your behalf that gives you up to 12 months to pay the tax you owe without incurring further penalties.
An HMRC tax investigation will not go away. Cooperation is the key to reducing and potentially removing the risk that a tax penalty will come your way. It will also allow you to complete the investigation as quickly as possible so you can focus on running your business.
Mike Smith is a senior director at Companydebt.com, and an insolvency expert of some 4 decades.
We recommend you read our article on tax investigation insurance – which will provide peace of mind for business company owners.