All companies are required to undergo routine tax audits in due course of their business. However, a serious tax investigation may be initiated if the HM Revenue and Customs Department believes that your tax filings are fraudulent or inaccurate.
A tax investigation can be a stressful and complex affair. Unless you’re absolutely certain of how to tackle the situation, seek professional advice immediately once the tax inspection or investigation commences.
All VAT-registered businesses or companies that use PAYE for paying employees are subject to tax audits regularly. The audit will verify whether your systems and records are in order and focus specifically on certain areas that are known to attract mistakes.
If the HMRC believes that you’re deliberately concealing your income or making repeated errors, they may launch a tax investigation. On average, a tax audit may be carried out once every 5 years. Only a minute percentage of all corporation and income tax returns are subject to investigation in a year. But this may change if the HMRC suspects underpayment of taxes. Tax audits and tax investigations may be done on a more frequent scale if:
o HMRC officials receive a reliable tip-off
o Your business routinely takes cash payments
o Your industry is being specifically targeted by the HMRC
o You receive income from your property
o You possess offshore accounts in banks
o Your tax filings and your standard of living/revenue generation of your business are inconsistent
o Your expenses are unusually high
o There are substantial variations or inconsistencies in your returns over the years
o Your tax filings are always late or filled with errors and inaccuracies
o You should consider getting an insurance policy that can cover the expenses of a tax investigation or audit into your business or join an association offering this benefit
o Tax Investigation or Tax Audit Notification
Firstly, the HMRC will contact you to inform you about their intentions. For tax audits, they usually visit your office and verify your records whereas tax investigations commence with an official letter asking you to submit information.
During a tax investigation, this letter will also inform you about the depth of the tax investigation. You can consult your accountant to know more about why your business has been targeted for a tax investigation.
How to Deal with A Tax Investigation or Tax Audit
Seek professional advice immediately when you’re informed by the HMRC of their intention to investigate or audit your business.
In case your business is facing a tax audit, ask your company’s accountant to verify that the systems and records are all in order. The audit will be much smoother if your company provides accurate and detailed information when the tax inspector comes to visit.
If your business is facing a tax investigation, consult a specialist to learn how you should respond to documentation and information requests. Don’t have unaccompanied meetings or phone conversations with the inspector – communicate in writing as much as possible.
Needless to say, don’t destroy or lie about any evidence since that will only lead to severe penalties if you’re caught. A tax investigation may take months before it reaches its conclusion. If the HMRC determines that it needs more information, it may also start expanding the ambit of its investigation. It is always best to have a professional by your side during a tax investigation, who can help you respond to the situation effectively.