What Is a HMRC Tax Investigation? (What You Need to Do)

HM Revenue & Customs (HMRC) is investigating some businesses over unpaid taxes. If you think you might be one of those businesses, it pays to understand what happens next. Here’s everything you need to know about how HMRC investigates businesses.

What does HMRC do?

HMRC looks into unpaid taxes owed to UK authorities. This includes income tax, national insurance contributions and corporation tax.

How many people work at HMRC?

There are around 12,500 employees working at HMRC. They include accountants, auditors, investigators, lawyers, technicians, economists and support staff.

Where does HMRC investigate businesses?

HMRC sends out thousands of letters every day to businesses across the UK. These letters tell businesses that they owe money to the government. HMRC usually starts off looking at small businesses, such as sole traders, partnerships and limited companies. But HMRC can look at larger businesses too.

What is a tax investigation by the HMRC?

An HMRC investigation could mean everything from a routine audit to something much worse. If you receive a letter or phone call saying there is an investigation into your finances, it doesn’t necessarily mean you’ve done anything wrong. You might even be able to help HMRC solve a problem without knowing about it. But you shouldn’t assume that just because someone contacts you about an investigation that you’re under suspicion.

HMRC will send you a notice telling you what they are investigating. This usually happens via a letter or telephone call. They’ll ask you questions such as how much money you earned, how much you spent, and whether you paid enough tax.

If you think you haven’t broken any rules, don’t panic. HMRC won’t start sending letters unless they suspect you have committed a crime. And if you do nothing wrong, you probably won’t hear from them again.

But if you are being investigated, you should contact your accountant immediately. He or she will know what to do next.

The three types of tax investigation

HMRC are investigating more companies than ever before – and there are more reasons why. They want to know how much money businesses make, what they spend it on, and whether they pay enough taxes. If they find out that you’ve been cheating the system, you could face fines up to £10 million and even prison. But don’t panic if you’re doing nothing illegal; you shouldn’t worry about being investigated. Here are some things you might hear:

1. A routine audit

A routine audit is when HMRC send someone into your office to check everything from your accounts to your payroll records. This is usually done every few years. You’ll probably receive a letter telling you when and where to go.

2. An unannounced inspection

An unannounced inspection is when HMRC come to your premises without warning. Usually, they do this when they suspect something is amiss. You’ll probably receive no notice of an unannounced inspection, but you’ll still have to attend.

3. An assessment

An assessment is when HMRC decide that you owe money. For example, maybe you didn’t declare all income, or maybe you haven’t paid enough corporation tax. In either case, you’ll be sent a bill.

1. Full enquiry

A full enquiry involves a lot of work for most accountants and lawyers. They don’t simply check if everything is correct; they want to know why it isn’t correct. This type of investigation can lead to a penalty or even a fine.

The purpose of a full enquiry is to give the auditor confidence in the accuracy of the information provided. Auditors are trained to look for inconsistencies and mistakes, and they are expected to find them. If there are no errors, then the audit report will be clean – without any red flags.

For example, if you provide incorrect information about your tax liability, the auditor might ask you to explain what happened. You may say that you didn’t understand the question, or you may try to change the subject. But if you do nothing, the auditor will assume that you are hiding something. In fact, he or she may decide that you are guilty of fraud.

In addition to providing accurate information, you must answer questions honestly. For example, if you claim that you did not receive a payment, you must prove it. You cannot simply state that you forgot about it.

If you fail to cooperate during an audit, you risk being charged with fraud.

2. Aspect enquiry

HM Revenue & Customs (HMRC) has been warning small businesses about the dangers of failing to file their annual tax return. If HMRC suspects that someone hasn’t filed their return, they send out an “aspect enquiry” – a letter asking for information about how much income the business had, what expenses were paid, etc. This is usually done via post, although some people receive emails.

The reason why HMRC sends out aspect inquiries is because they want to make sure that everyone files their return. In fact, HMRC says that most small businesses don’t bother filing their return at all. A survey conducted by the government agency found that just one in five small businesses actually file their taxes.

If you do receive an aspect inquiry, here are some things you should know:

1. You must respond within 14 days. Failure to respond could lead to penalties being imposed.

2. An aspect enquiry doesn’t necessarily mean that HMRC thinks that you haven’t filed your return. It could simply be a reminder that you need to file your return.

3. An aspect enquiry isn’t always sent by post; it could come via email too.

4. If you decide to ignore the aspect enquiry, you won’t automatically lose your refund. However, you could still face penalties.

3. Random check

Aspect enquiries will focus on specific parts of your tax return; full enquiries will include an inspection of all of it; random enquiries will look at your entire return

Tax enquiries can be broken down into three types: aspect enquiries, random checks and full enquiries. Aspect enquiries will examine certain aspects of your tax return such as income, expenses, deductions or investments. Full enquiries will review every area of your return while random checks will inspect your return in areas deemed to be risky.

Random checks are a useful tool to identify potential issues with your tax return. They are best used to find errors in your records rather than to confirm whether you owe money. However, there are times when a random check can provide additional insights into how you manage your finances. For example, if you report a large amount of cash withdrawals, it could indicate that you use the cash to pay bills or make purchases.

What are the steps in a tax investigation?

An audit is an examination of records and accounts. This includes checking whether the information recorded is correct and complete. If it isn’t, HM Revenue & Customs (HMRC) will contact you to ask why.

A tax investigation involves examining your records and accounts to see if there are errors or omissions. These could mean that you haven’t paid enough tax or overpaid. HMRC will examine your books and records to find out what happened. They’ll talk to you about your finances, including asking questions such as how much money you earn, where you live and work, and what you spend your money on. You may be asked to provide documents and information.

During an investigation, HMRC will usually send a letter to let you know that they’ve opened an enquiry into your finances. This tells you that someone has looked at your accounts and found something wrong. There’s no reason to panic – most cases don’t lead to prosecution. However, you might be asked to attend an interview with HMRC officers.

You must tell HMRC about anything unusual or suspicious in your finances. For example, if you sell goods online, you must declare the value of those sales. If you buy things like property or shares, you must keep records of the transactions.

If you’re worried about being investigated, you can speak to an accountant or solicitor. Your accountant will help you prepare your taxes correctly and make sure everything is done properly. He or she will also advise you on making changes to your tax return if necessary.

Your solicitor will do the same thing. In addition, he or she will represent you during a tax investigation. If you’ve been accused of fraud, your solicitor will act for you in court.

Which taxes can be looked into?

HM Revenue & Customs (HMRC) says it will look into companies that don’t file their tax returns on time or file an incorrect return. The agency will also investigate if there is evidence that the company engaged in fraud or money laundering. HMRC will also check whether the amount of VAT paid has been correctly recorded.

The announcement follows reports that some businesses are failing to pay enough corporation tax. A government spokesperson told HuffPost UK that “it is important that people comply with their legal obligations.”

What triggers a tax investigation?

Any unusual activity in your tax records could trigger a tax investigation. This includes anything out of the ordinary such as large cash transactions, foreign bank accounts, unexplained wealth, suspicious behaviour or even just unusually high spending.

Most checks are triggered by HMRC’s Central Risk Team, who uses sophisticated data analysis tools to identify unusual activity. These include checking whether you have been involved in money laundering, terrorist financing, fraud, drug trafficking or child exploitation. They may also look into your family circumstances, employment history and personal relationships.

A tax investigation will normally follow a warning letter. If HMRC suspects that you are evading taxes, it will send you a written reminder about your situation. You will then receive a second notice giving you 14 days to respond. If you don’t reply within this period, HMRC will launch a formal investigation.

If you believe that you have done nothing wrong, we recommend speaking to one of our experts. We offer free initial advice and a range of tailored solutions including online account management. Our team of experienced advisers can help you understand what your options are and how best to proceed.

How far back can HMRC go during an investigation?

HM Revenue & Customs can go back five years for most investigations. However, it can go back further if it believes there is evidence of deliberate evasion. There are different levels of investigations depending on the severity. HMRC says it uses a combination of automated tools and manual searches to identify potential tax evaders.

The government agency can request information from third parties such as banks and credit reference agencies, including Experian, Equifax and Callcredit. This includes financial records, employment history and criminal convictions.

In addition, HMRC can ask people directly about their income and assets. If you don’t respond, it can use the courts to force you to answer questions. You could face fines of up to £500,000 or even imprisonment.

Top tips for your accounts

If you are running a small business, chances are you already know how important it is to keep up with your finances. But what about your personal finances? How do you manage your money? Do you even know where your money goes every month? If you don’t know how to use your bank statements, start learning now. You might find out something surprising. Here are some ways to make sense of your monthly bank statement.

1. Look for patterns.

You probably spend most of your money on rent, utilities, groceries, gas, insurance, car payments, credit card bills, etc. So why not look at your bank statement to see which expenses tend to occur in certain months? For example, maybe you pay off your mortgage each May. Or maybe you always buy flowers around Valentine’s Day. By looking at your bank statement over time, you’ll notice recurring patterns and be able to better plan your budget accordingly.

2. Track your spending.

Once you’ve identified recurring trends, take note of the dates and amounts associated with those expenses. Then, try to figure out whether there’s anything else you could cut down on or change to save money. Maybe you’re paying too much for cable TV. Perhaps you could switch to a cheaper provider. Or perhaps you could stop buying snacks from the vending machine. There are many things you can do to cut costs without sacrificing quality.

3. Use your bank statement to set goals.

Now that you’ve looked at your bank statement and found some areas where you can save, it’s time to turn your savings into bigger gains.

Frequently Asked Questions

How long will an investigation into your taxes take?

HM Revenue & Customs (HMRC) investigations are generally short term and typically involve a single case. However, there are exceptions where HMRC investigate multiple cases simultaneously as part of a wider strategy. Investigations into individual taxpayers can vary greatly depending on the complexity of the issue, the number of people involved and the extent of the activity being investigated.

The opening letter issued by the agency is usually a good guide to the potential length of any inquiry. In general, it is expected that the investigation will conclude within six months. This timeframe could be extended further if additional evidence needs to be gathered.

Are you required to attend a meeting or interview with HMRC?

HMRC usually requests a meeting but HMRC do not have the power to force you to attend a meeting.

Generally during civil investigations, HM Revenue & Customs (HMRC) often ask for a meeting but HMRC cannot compel you to attend a meeting unless it is part of a criminal investigation.

The requirement to be transparent and open about what happened, how much money was involved and why it happened is important to mitigate any potential penalties.

However, in serious tax evasion situations where there is a criminal case, HMRC can request a formal interview under caution. This is different to a meeting because HMRC will want to question you formally and record the interview.

More information on HMRC interviews can be found here. If you are contacted by HMRC please contact our team immediately.