Unexpected contact from HMRC generally doesn’t bring good news, and if you’re being informed that your business is going to have a Tax Compliance Check, this can bring about a lot of stress, and time-consuming activities that take you away from the day-to-day running of your business.
What Can HMRC Investigate in a Tax Compliance Check?
If HMRC contact you about a Tax Compliance issue – this could be done by post or phone, to you directly, or to your accountant or representative tax agent – they can look at:
- Taxes that you pay
- Your accounts
- Tax calculations
and if appropriate:
- Self-Assessment Tax Returns
- Company Tax Returns
- PAYE returns
- PAYE records
The inspection will take a close look at the business finances (and possibly your own personal finances, if applicable), and check that you’ve been paying the correct amount of tax. This may relate to a current year, or a previous year – if deliberate tax evasion is suspected, the investigators can look back as far as 20 years, for careless tax returns they can examine up to 6 years, and in ‘innocent errors’ they can request 4 years of data.
What Might Have Triggered a Compliance Check?
Sometimes it’s just, unfortunately, random (an estimated 7% of the time), but for the majority of cases, there has been some sort of activity that has prompted the Tax Office to want to take a closer look.
Some of the issues that may prompt a Compliance Check include:
- Repeated late return filing
- Repeated errors and corrections submitted on returns
- Inconsistent or substantial variations between years
- Higher than industry standard costs reported
- Having offshore bank accounts
- Investing in schemes which have been flagged as tax avoidance schemes
- Investing in schemes which have been flagged as potential tax avoidance schemes
- The business is operating in a high-risk industry that routinely sees cash payments
- HMRC is informed that your company may not be compliant with tax legislation and obligations.
Anyone, private individual or business owner, can be contacted for a random enquiry and Compliance Check. The important thing to do, if you find yourself on the receiving end of one, is to not panic- and get your information in order.
How Long do You Have to Respond, and What Happens if You Don’t?
Once the notification of the investigation arrives, the correspondence will explain what you can and cannot appeal, and they will request specific information from you – generally you have up to 40 days (from the date of issue of the notice) to get this data to them.
Failure to provide the information in time will see HMRC issuing a formal information notice which could result in a fine of up to £300, and further fines of up to £60 per day until they have received your response with the requested accounts.
It’s essential that you contact HMRC immediately if there is a deadline that you cannot meet, so you can arrange and agree a new date with them, in order to avoid any of these penalties.
What Actually Happens During and After a Check?
Compliance Checks are considered to be short, focused reviews that proved a high-level of investigation, which may see a Tax Officer visit your home or business premises (if you have a Business Advisor they may visit their office instead) – or you may be asked to attend a meeting at a local tax office and meet with the Tax Officer there.
You will be informed ahead of time what information, accounts, and details you will need to bring or have available for the meeting, and it could include:
- Bank statements
- Credit Card statements
- Chequebooks and Paying Slips
- Sales records
- Invoices for Sales
- Invoices for Expenses (including receipts)
- Job quotes
- Pricing Estimates
- VAT records
- Payroll reports
Not all of this data will apply to all businesses, and if the information is being stored digitally, HMRC may request access to the software system that you’re using, as well as a copy of the records.
The amount of time an investigation takes to complete will depend on what the Tax Officer is looking at, and whether it’s a small issue or a larger one – generally, smaller investigations can take between 3 to 6 months, whereas larger ones can be upward of 16 months.
Once the investigation or check is finished, HMRC will generally write to you with their findings and the results.
If you’ve paid too much tax, you may receive interest on the amount that you’re owed. If you’ve not paid enough tax, you’ll have 30 days to pay the balance, and will normally be required to pay the interest (calculated from the date on which the tax was due).
You may also be charged a penalty, but HMRC will look at the circumstances – including whether there were genuine reasons why you over or underpaid the tax, whether you informed HMRC as soon as you could, and how helpful you were during the proceedings.
If stronger action (such as criminal convictions) are raised during the process, you will be informed.
At any point during the Tax Compliance Check, you can apply for an Alternative Dispute Resolution (ADR) to help resolve a dispute with HMRC or get information about issues that need a legal ruling.
When it comes to handling your finance, it’s important that they’re complete, consistent, understandable, filled on time, and comply with the legal obligations surrounding them.
If you need help and advice on preparing your accounts, or you’re facing a Compliance Check and don’t know how to best handle it – get in touch with our experts today, and we’ll happily provide consultation, and specific services to help you get back on track.
