Tax investigations by HMRC have been increasingly on the rise and it is certainly something we have seen evidence of in the last 12 months here at Pursglove & Brown. There have been unusually higher instances of clients getting in touch this year in relation to VAT, tax and PAYE visits from HMRC.
With 1300 people employed at HMRC solely to detect counter-avoidance, it is no surprise to learn that 1 in 10 small businesses are being investigated at any one time. At a HM Treasury Sub‑Committee last April it was revealed that £28 billion was brought in through compliance yield, with £8 billion of that from large business.
David Richardson, Interim Director General, Customer Strategy and Tax Design, at HMRC advised the committee in April “Our compliance policy is the same right across the different sectors of the population, which is to try to prevent non‑compliance happening before it would otherwise happen, and then to pursue people where there is non‑compliance to get the correct amount of tax in.”
Addressing the fact that 1 in 10 small businesses are under investigation at any one time, David Richardson stated “We have a tax gap in this country, on our figures, of £34 billion; 46% of that is attributable to small businesses. Most small businesses pay the correct amount of tax. Those that do not are unfairly competing with their fellow businesses, so, from a competitive point of view, it is important that we tackle the businesses that are not complying. The taxpaying population as a whole would expect us to ensure that everybody pays the right amount of tax.
If you look at small businesses, a large amount of the tax that is being lost is not through deliberate evasion or avoidance, but through failure to take reasonable care or through error. About 28% of the tax gap is attributable to a failure to take reasonable care and error, and a large amount of that is attributable to small businesses. The way to deal with that, ideally, is to stop it happening in the first place.”
What should I do if I get a tax investigation letter from HMRC?
If HMRC have decided to carry out an investigation into your business, you will receive a call or a letter from them advising of a visit and the nature of the visit, whether it be VAT or PAYE related. They will detail the date, time and visiting officer who will check all your records and returns. Following on from this visit, they may want to investigate further or agree on further action points to be taken.
If you receive such a notice, you don’t necessarily need to panic – HMRC carries out many random investigations so it doesn’t always follow that you have done something wrong.
- If you have an accountant, contact them straightaway to advise them of the visit as you will need to agree a plan of action.
- The preparation for such a visit can take some time, as can the visit itself and any subsequent work requested by HMRC.
- The costs of your accountant carrying out this unexpected work on your behalf should not be underestimated.
- HMRC Investigations and the work carried out as a result, can be lengthy and costly which is why we offer tax investigation insurance to our clients for a small fee.
- This annual policy, based on your annual turnover, covers you for work to be carried out and time spent in relation to your HMRC visit.
- For business clients, where we are the tax return agents of the directors, partners or company secretaries (including spouses/civil partners), this insurance fee also covers their personal tax returns, where rental income is less than £50,000 per annum.
The cost of such a policy is likely to be insignificant compared to the cost of an investigation. Here at Pursglove & Brown we use Croner Taxwise who also provide HR legal advice in their tax investigation policy.
Why would a tax investigation occur for a business?
More and more, HMRC are using technology to automate the process of identifying suspect businesses and liaises with other agencies to spot inconsistencies. Considering that HMRC has powers to go back up to 20 years if it suspects tax has been deliberately evaded, the cost of ensuring annual cover for tax investigation pales in comparison.
In addition to HMRC’s policy of randomly selecting businesses of all sizes to investigate, your business may also come to the attention of HMRC due to a number of factors:-
- Receiving a tip off from an ex employee or a competitor of yours
- Uncertain and changeable margins – if your profits are constantly up and down without a clear explanation, HMRC will want to understand why this is the case
- Consistently filing your returns late / inaccurately
- Your business happens to be a sector that HMRC is targeting currently
- Your tax returns are inconsistent with your sector
- Lack of profit – prolonged periods without profit will beg the question why are you still in business
Of course, the best way to avoid the costs of such an investigation is to not give HMRC any reason to suspect you in the first place:-
- Make sure you consistently file your tax returns on time
- Use an accountant to make sure you are compliant
- Pay your tax bills before they are overdue
- Avoid running your business as cash only