Arranging your financial and tax details is an important part of running any successful business. Although it’s a challenging task to ensure all tax affairs are in order, it is also a necessary one. Failure to do so can result in you and your business falling under investigation by HMRC.
Whether you’re a sole trader or run a limited company, being investigated by HMRC adds unnecessary cost and difficulties to both your business and your own personal wellbeing.
Most investigations by HMRC are avoidable if the proper procedures are put in place to declare all your earnings. This includes a well-ordered accounts system, keeping track of all your payments and expenses and making them as transparent as possible, and accurately submitting your self-assessment on time.
So, when does HMRC investigate self-employed individuals? There are several main causes which can lead HMRC to investigate you and your business. It is therefore important to recognise what these are and to understand how best to prevent them from occurring.
When does HMRC investigate self-employed individuals?
Before self-assessment forms became a requirement, only 1 in 100 tax returns fell under scrutiny. Now, however, that number is more like 1 in 10. This means that every self-employed taxpayer will have their affairs inspected every ten years on average.
Of these taxpayers, only a small percentage will be investigated, but this percentage increases if HMRC suspects they are being underpaid, either deliberately or by accident.
When does HMRC investigate self-employed individuals?
Whilst HMRC has never fully disclosed what triggers them to investigate a business, there are several common mistakes, discrepancies, and deceptions which are known to result in one.
They’ve received a tip off or suspect deception
HMRC may decide to open an investigation if they are contacted by someone who has concerns over your declared or undeclared finances. HMRC may themselves decide to open an investigation if they suspect you are hiding certain parts of your income as well. This may be more likely if you have a previous record of tax evasion or other unlawful behaviour.
Mistakes have been made
It is your responsibility to submit your self-assessment form every year, containing all necessary information about your income and profits.
There are several mistakes which you can make when declaring your finances, usually down to accidental oversights, a hurried self-assessment, and lack of preparation:
- Late payments– HMRC may view a late payment as evidence your financial affairs aren’t properly managed, which could prompt them to open an investigation.
- Accidental oversights: Ticking the wrong box, missing out a section of your tax return, or forgetting information about your supplementary income may arouse suspicion about your financial situation. These mistakes are often the result of a late or hurried self-assessment form.
There is no legal requirement to hire an accountant to complete your self-assessment, but there is evidence which shows individuals who don’t hire accountants are more likely to be investigated by HMRC.
This is due to the increased likelihood that mistakes will be made by those who conduct their self-assessments without professional help.
HMRC have multiple ways of discovering any irregularities or discrepancies in your finances.
Their Connect computer system is capable of finding any discrepancies across your multiple public records:
- Cash payments– If your finances are received through cash payments but your self-assessments contain low cash declarations, HMRC may become suspicious. All banks also have a legal duty to report your income data to HMRC.
- Continued lack of profit– If your business survives whilst continuing not to make a profit over the course of several years, HMRC may suspect you are under-reporting your profits or over-reporting your expenses.
- Fluctuating profits– Businesses often don’t have the same turnover each year, but dramatic fluctuations may lead HMRC to become suspicious about the accuracy of your reported profits.
What are the types of HMRC investigations?
Once HMRC has decided to open up an investigation about your financial affairs, there are two main types of investigation they may proceed with: a full enquiry and an aspect enquiry.
- Full enquiry– This usually occurs if HMRC believes you are under-reporting your profits to receive a lower tax bill. They will ask you to provide your full business records and may also ask you for your personal financial records.
- Aspect enquiry– This usually occurs if HMRC thinks you may have made a genuine mistake with your self-assessment. In which case, they will only investigate one aspect of your financial records.
What happens during a HMRC investigation?
This will depend on the type of investigation being conducted. If HMRC is undertaking a full investigation, you may be required to provide your full financial records, both business and personal.
If it is just an aspect enquiry, the likelihood is that only one part of your records will fall under scrutiny.
For either type of investigation, HMRC may request:
• Full business accounts and tax calculations
• Bank statements
• Sales invoices
• All tax details
• All expenses receipts
• PAYE records
Investigations can delve deep into your financial records, from the last few years to several decades. If HMRC believes you have made an honest mistake, an investigation is only likely to request access to the last few years of your accounts.
Safeguarding your business
The burden of proof regarding your self-assessment rests with HMRC, but it is important to be as transparent as possible with your records to help resolve the issue.
HMRC investigations usually take up a lot of time and come at a high cost, both in terms of money, stress, and hours wasted. Investigations often result in an inflated tax bill as well, which could affect your business.
The best way to protect yourself against the possibility of an investigation by HMRC is to take out HMRC investigation insurance to cover any legal expenses. It is also important to hire an accountant to help ensure any costly mistakes are avoided.
Call us on 0203 011 1898 or fill out the contact form if you would like some further information on how WIS Accountancy can help in case of an investigation by HMRC. As a family of businesses, so we can also assist customers with mortgages and business insurance with our WIS Mortgages and WIS Business Protection schemes.