They say two things in this life are certain: death and taxes. For some, dealing with one creates longing for the other! It can be especially tricky for young businesses without a dedicated finance professional (we can help you with that…), going for their first lap around the track. The first time is always the toughest. HMRC, however, do not discriminate. Whether you’re Bernie Ecclestone or Bill the Handyman; if they suspect that you have underpaid, over-claimed or deliberately mislead them, they will come knocking.
With all of that said, they do operate a ‘money first’ approach to unpaid tax. HMRC’s first choice is always to try and recover as much of the money owed as possible, as quickly as possible. This means that settlements tend to win out over prosecutions. This doesn’t mean that you’ll get an easy ride, but it’s always nice to know that you’re (probably) not going to prison. Probably.
To avoid all of the scenarios outlined above (eesh), let’s first look at the three kinds of HMRC investigation, their process for dealing with it all and exactly what it is that sets them off…
“If you know the enemy and know yourself, you need not fear the result of a hundred battles.” Sun Tzu, The Art of War.
(Disclaimer: We’re not saying the tax man is your enemy, but it is fun to imagine yourself as a kind of tax Samurai)
HMRC Investigation levels
Everyone’s favourite kind of investigation; an out-of-the-blue, no warning, no reason, sneak up behind you and tie your laces together kind of investigation. If you’re subject to one of these, don’t worry too much. They really are random. If the HMRC had something to go on, you’d be looking at one of the next two…
As it says on the tin: HMRC are concerned about a particular aspect (or aspects) of your accounts. These range from straightforward mistakes and misunderstandings, to the warning signs of deliberate tax evasion. An aspect investigation will be thorough, no matter the mistake or misunderstanding. That means a slip on your return could uncover deeper issues that hadn’t previously been flagged. Make sure your finance team are ready to meet the challenge head on.
The big one. The technical term is a “belief in significant risk of error”, but rarely are full investigations launched off the back of a mistake. A full inquiry is, as you can image, exhaustive and will involve a deep look into your company records – and perhaps your personal ones too. Directors personal financial records are at risk of scrutiny, as HMRC are investigating a possible tax evasion; awarding them the jurisdiction to do so. Don’t say we didn’t warn you.
A Brown Letter
Where it all begins. If HMRC are planning to investigate, they usually start by sending a letter or calling the main telephone number for your registered business. They should tell you at this stage what kind of investigation they will be carrying out – a good place to start! This also gives you some indication of your next steps. Is it a random investigation and you’re 100% certain everything is ship-shape, great, follow the process outlined in the letter and all should be fine. If it’s more serious than that, or just a random investigation that you’re not fully prepared for, make sure your finance team is in place and ready to handle it.
Does your finance team need more firepower? Email us at email@example.com and let us know what your challenges are.
A lot of what HMRC will ask for at this stage relies on which level of investigation you are under. You will always be expected to provide the information which formed the basis of the particular tax return that’s under scrutiny. Missing information? You better hope there’s a copy out there than you can hunt down and hand over. Knowingly made a mistake? Now’s the time to admit it. If something is amiss and you’re not able to provide evidence to support your claim, honesty is the best policy. Get out in front of it to save yourself problems down the line…
The Main Event
The investigation itself. Once HMRC has all the records it needs, the investigation can begin. Again, whether it’s a random, aspect or full investigation will shape what happens here. In some cases, where a small discrepancy or mistake has occurred, this will be over fairly quickly. You may have already answered HMRCs questions in the last phase of the process, making the ‘investigation’ a formality. For more serious investigations, in which the Revenue need further information, they may wish to visit your office or the office of your accountant. At this stage, you want to wish that you’ve been keeping your books clean and easy to digest. The quicker they can find what they’re looking for, the quicker it’ll be over.
What Happens Next
Go straight to jail, do not pass ‘go’, do not collect £200 from the banker…
Not quite. There are a number of possible outcomes, dependent on what it is that the tax man finds. Here are the two main outcomes and how to deal with them.
The terms are fairly standard providing you can pay the outstanding amount. You have 30 days to settle in full with HMRC, after that you are looking at one of the following penalties:
Lack of reasonable care: A penalty of up to 30% of the extra tax due
Deliberate errors: A penalty of between 20% and 70% of the extra tax due
Deliberate and concealed errors: A penalty of between 30% and 100% of the extra tax due
Sometimes, a penalty is not all you’re looking at. If HMRC believe you have committed fraud you may be subject to criminal proceedings. At this stage, your behaviour throughout the process so far will be a factor. Did your hold your hands up at the start? You’re more likely to walk away with a penalty and a slap on the wrist. Did you knowingly defraud the tax man, cover it up and get caught? The outcomes here are fairly obvious. If you’re in this situation, perhaps reading this blog wasn’t the best use of your time right now.
How can I avoid this altogether?
If you’re one of the lucky, lucky souls on the receiving end of a random investigation: nothing. You’d best strap in and hope your books are up to scratch! The other two are easy to navigate.
Here are some of the things that can trigger an investigation:
Your tax returns are late and full of inconsistencies
You routinely take cash payments
HMRC Receives a tip-off
You operate in an HMRC targeted sector
Here are the things you can do to avoid this from happening:
Keep good records to ensure you are compliant
Ensure returns are filed accurately
Find out when bills are due and set aside money to cover all costs
Be prepared to explain and provide evidence for unusual activity
Know the reasons HMRC investigate business in your industry and get ahead of their concerns
It seems to simple, right? If that were the case, HMRC wouldn’t have convicted 679 individuals with a total of over 730 years in prison in 2016 alone (yikes!). You’re probably not up to anything untoward – we hope not, anyway! It does always help to have somebody that can get ahead of this stuff, put into place the preventative measures and keep your books balanced.
There are only two certainties in life: death and taxes. Let us help you find the person to take care of the tax, so you can keep an eye out for black cats and Deathwatch beetles…