Nobody relishes the idea of a HMRC inspection. Since 2010 the chances of any business being inspected by HMRC have risen, due to a pledge by the then government to recoup some of the deficit in public finances. Although larger businesses are being looked at more carefully by HMRC, small businesses aren’t escaping the scrutiny of the tax office either. Keeping accurate records is paramount if you want to avoid potential issues in the future.
What happens in a HMRC inspection?
If your business is selected for a tax inspection, HMRC will want to take away all of your business records for the past tax year and come back to ask you questions about them. Should they find that you haven’t paid some of the tax that’s due, they can fine you £100 plus make you pay any tax they believe is owed.
If you’ve just made a simple mistake, they might be lenient, but if they suspect there’s something other than an honest omission going on they could ask you for five years of business records rather than just the one year that’s usual. Most of the time they won’t find anything, and although there’s no penalty, it can cause a lot of inconvenience and worry.
Small firms are often hit hardest by the stress of an HMRC inspection. It can take a while for them to come back to you and confirm that all is OK, while asking you questions, and while you’re in limbo, it can be unsettling.
What triggers a HMRC inspection?
There is a small percentage of random checks every year, but in the vast majority of cases HMRC only triggers an inspection if they think there might be something going on.
HMRC are interested in the ratio analysis – if they notice that your figures change a lot from one year to the next. If inspectors notice any unusual fluctuations in income or expenses on your tax return, they might be a cause for concern, and this can set off what’s called an aspect enquiry where they will want to know more about why the figures have changed so much. Although this is still a worry, it’s less stressful than a full blown enquiry and if they don’t find anything or you can adequately explain the reasons for any differences, it should be fine.
One way to avoid arousing suspicion if there’s a good reason for a big change in your figures is to use the extra space on your tax return form to explain any unusual fluctuations in the businesses turnover or profit.
If you declare everything and keep your records accurately, you should theoretically have nothing to fear from HMRC, although be warned, ignorance is no defence if you’re found to have been routinely making mistakes. Ideally you should make sure that your tax returns are filed on time and in full, so that HMRC doesn’t have any cause for concern.
Keep transparent records
HMRC has the power to obtain information from third parties now, and there are even increased powers to search premises. If your business does come under scrutiny you’ll have to make sure that everything is in order. HMRC also has software it can use to analyse tax returns and compare them to the average for your sector.
Make sure that you have records of absolutely everything that relates to the business – don’t throw anything out. If you don’t keep paper copies of business bank statements, you may have to obtain them from your bank if HMRC decides to inspect you. If you are missing any important information, speak to your accountant to see if there’s anything you can do to fill any information gaps.
Honesty is the best policy
If you know there is an issue with your tax return, it’s best to tell HMRC straight away, explaining why things went wrong or weren’t recorded properly. If you try to cover up glaring omissions or errors, the chances are HMRC will find them anyway and when they do, you’ll face stiffer penalties or even a criminal investigation.
The top three ways to make sure that your business is inspection ready (and avoid being inspected wherever possible) are:
- Make sure you always submit your returns on time
- Make your tax returns accurate and complete – ask an accountant for help if you need to
- Explain any changes from one year to the next on your return. Significant changes in your turnover or gross profits will make HMRC wonder what’s going on, especially if drawings taken from the business or the remuneration paid don’t look right.
If you need help keeping your business records organised contact Emma Stevens at Emma Stevens Accountancy.
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