How to avoid HMRC squeezing extra tax from you

It is hard to believe that the HMRC do actually target small, innocent businesses for investigation to squeeze extra money for the tax pot each year. But they do. Principally because they have a difficult job to bring legitimate tax fraud to light and their powers are such that they can use specific legislation to their advantage to help meet their targets.

Unfortunately, the law is stacked against the tax payer but by understanding a few of the investigation methods that HMRC use can not only help to avoid pitfalls but also help to challenge the inspector if you are unfortunate to be under investigation. This may be via tribunal too so it can get serious. And it is down to you to prove the taxman wrong!


HMRC make assumptions when they are assessing your tax return.

For example, if personal drawings (or salary / dividends) from the business are low, HMRC may “assume” that you don’t have enough money to live on and therefore their argument would be that there must be an element of undeclared income. Of course, this may not be the case.

Ask the tax inspector for a list of all their “assumptions” used to assess your cash flow or other financial analysis. You can then systematically work out how to challenge these, if they are incorrect.


If the taxman uncovers errors one year, legislation depicts that they are able to again “assume” that the same error occurred in previous years. This again isn’t always the case, of course.

As above, ensure that you are aware of the breakdown of additional tax being charged for previous years and argue your version of events if there was indeed no continuity in their original assumption.

Bank deposits

HMRC will no doubt want to fully inspect your business and personal bank statements. Any unidentified credits will be scrutinised in an attempt to prove these are undeclared income and therefore tax is due. Once more, this is not always the case.

Always aim to bank your business income in your business account and your private income in your private account. In addition make notes on the bank statements (or a record of some kind) to verify what could be considered an unidentifiable transaction.

The bottom line is that it IS down to you to prove HMRC wrong when you are under investigation and they do have tools at their disposal to make this very difficult for you. But don’t be afraid to challenge their “assumptions” and “allegations” if HMRC have in fact missed the boat or are clutching at straws.

And remember, there is nothing like avoiding the problem in the first place so always try and simplify your financial affairs as much as possible, record everything and seek the help of your accountant if ever in doubt.

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