Every business needs to keep accurate records, regardless of whether you’re a sole trader or a large corporation. We recently posted about how long you need to keep business receipts – check it out if you haven’t already. A Tax audit is a way of checking that correct and sufficient information is being held, and that your business is complying with all relevant legislation. There are different types of audits which may be carried out. It’s important to understand the difference and what your obligations are.
What is a Tax Audit?
Unless you are exempt (more about that below), your company accounts must be audited at least once a year. Auditors will check that the financial statements are accurate by viewing the evidence available. They will also make sure that the financial statements have been compiled to the necessary accounting standards, and that you are compliant with legislation.
However, you may also be chosen for a tax audit by HMRC. If you are VAT-registered or have PAYE employees, it’s common to have regular tax audits. These typically take place every five years, approximately.
HMRC may also choose to carry out tax audits on other types of companies too. These are more likely to occur if HMRC believes you are either making errors or are making a fraudulent return. You cannot opt out of an HMRC tax audit. If you are selected to be audited, you must comply with any requests made – no exceptions.
Are You Likely to Be Selected for an HMRC Audit?
If you are not in one of the groups that is expected to undergo regular HMRC audits, there are some factors which may increase your chances of being chosen for an audit:
- Filing your tax return late
- Paying your tax late
- Making errors in your tax return that are corrected by HMRC
- Substantial variations in your tax returns, such as a significant drop or a large rise
- Your costs are much higher than the average for your industry
- You hold offshore bank accounts
- You receive income from a property
- You work in an industry which HMRC considers to be high-risk – for example, where lots of businesses receive cash payments
- Someone tips off HMRC
Even if many of these factors apply to your business, it does not mean that you will automatically be selected for an audit. You will however, be at a greater risk so it’s essential to ensure that your accounts and financial statements are accurate and compliant.
Who is Exempt from an Audit?
No company is exempt from an HMRC audit but there are other types of audits which can be carried out.
A private limited company must get their accounts audited if this is stipulated within the articles of association. The shareholders can also request an audit.
If neither of these conditions apply, you may be exempt from getting your accounts audited if:
- Your annual turnover does not exceed £10.2million
- You have 50 or less employees (as an average)
- Your assets are not worth more than £5.1 million
In order to qualify for an exemption at least two of the above three criteria must apply.
Even if you meet the criteria for claiming an exemption, you must have an audit if any of the following apply for the last financial year:
- A public company (apart from dormant companies)
- A subsidiary company (providing an exception does not apply – you can read about this here)
- Involved in the issuing of e-money or banking
- An authorised insurance company
- Carrying out insurance market activity
- A corporate body whose shares have been traded within a European state on a regulated market
- A MiFID (Markets in Financial Instruments Directive) investment company or a UCITS (Undertakings for Collective Investment in Transferable Securities) management firm
If you are able to claim an exemption from audit, you must include a statement on the balance sheets of your accounts. A statutory wording must be used.
Is There Any Other Reason I Would Need an Audit?
Not all companies are obliged to have an audit, but some choose to have an audit done anyway. Even if you’re not compelled to do so by law, being audited can be a useful exercise.
An audit can provide reassurance about the compliance and accuracy of the company accounts. It can also be invaluable if you want to raise finance or qualify for credit.
Banks typically need to see audited accounts to consider applications for lending and some suppliers prefer to deal with companies whose financial worthiness has been verified.
For Further Support, Contact Yorkshire Accountancy
If you have any additional questions or need support with a tax audit, do not hesitate to contact our friendly team. We are here to help you!