Worried about an HMRC investigation? Here are the triggers

His Majesty's Revenue and Customs (HMRC) is the UK's tax authority, responsible for collecting taxes and enforcing tax laws. This includes the administration and collection of direct taxes, such as Income Tax, Corporation Tax, Capital Gains Tax (CGT), and Inheritance Tax, as well as indirect taxes, including Value Added Tax (VAT) and Stamp Duty Land Tax (SDLT).

Business owners will be familiar with the process of filing their accounts and tax returns each year and more often than not, that’s the extent of their interactions with HMRC. However, some may find themselves under investigation by HMRC’s taskforces. This could be due to a variety of reasons, some of which aren’t even caused by the business owner.

1. Errors or omissions in tax returns

One of the biggest triggers for a tax investigation is there being incorrect calculations when filing tax returns. This could be something as simple as a decimal point being out of place or something bigger, like failing to account for allowable deductions which can lead to discrepancies.

Errors in reporting income or expenses are another aspect that can result in discrepancies between your records and HMRC's data. This could be due to misclassifying income, failing to declare certain types of earnings, or claiming ineligible expenses.

One of the main reasons for errors like this creeping in when filing tax returns is not being prepared. Many people wait until the last moment to file their tax returns, which means it can turn into a rushed job. Late or incomplete tax returns can also raise red flags with HMRC. This is why working with an accountant is important as they will keep you on track and ensure everything is in order.

2. Suspected fraud or evasion

The most obvious reason for HMRC to launch a tax investigation is if it suspects fraud or tax evasion. Failing to declare all income or diverting funds can be considered fraudulent. This might involve using offshore accounts, cash transactions, or other methods to hide income from HMRC.

Secondary to this is making false or exaggerated expense claims. This includes claiming personal expenses as business expenses or inflating the cost of purchases.

3. Risk assessment and intelligence

Tax investigations aren’t just triggered by mistakes or suspicious activity though. Certain industries, such as construction and hospitality, may be subject to higher scrutiny due to known risks. For example, the construction industry is often associated with cash payments and undeclared income.

HMRC uses advanced data analytics to identify patterns and anomalies that could indicate non-compliance. This includes comparing a business's performance to industry benchmarks and analysing trends in financial data.

HMRC also takes tips from employees, suppliers, or customers which can initiate investigations. If someone suspects that a business is not complying with tax laws, they may report it.

4. Random checks and audits

HMRC also has the right to conduct random checks to ensure compliance with tax laws. This could involve selecting businesses based on various factors, such as size, industry, or geographic location.

Audits may be focused on specific sectors or industries to address emerging risks. For example, businesses in the gig economy have been of interest recently to ensure that workers are correctly classified as employees or self-employed as this can affect how much tax is owed.

5. Changes in business circumstances

Rapid business growth can attract attention, especially if it's not accompanied by corresponding tax returns. A sudden increase in revenue or profits may trigger an investigation to ensure that the business is paying the correct amount of tax.

On the other end of the spectrum, unexpected business closures or liquidations can trigger investigations to assess tax liabilities. HMRC may want to ensure that the business has paid all outstanding taxes before it is dissolved.

Final thoughts

The reality is that any business can be investigated by HMRC at any time. If you find yourself under investigation by HMRC, it's crucial to take immediate action. Seek professional advice from a tax advisor or accountant who can help you understand your rights, gather evidence, and navigate the investigation process. Remember, early engagement with HMRC can often lead to more favorable outcomes.

Find out how Wellers can help you prepare for a tax investigation.