Part 1: HMRC Tax Investigations – Are you at risk?

Covered in this article:

Who is at risk of an investigation?

What could trigger an investigation?

Typical investigation procedure


In an attempt to fill the “gap” in public finance equating to billions of £’s a year, the government continue to invest millions of £’s in budget to tackling tax evasion and fraud. Therefore the chances of you getting a tax inspection by HMRC are unfortunately ever increasing.

“But I do everything above board, so I have nothing to worry about!” I hear you say.

Who is at risk of an investigation?

The reality is that even for those who actually do everything above board HMRC may still challenge, nit-pick and ultimately find fault with tax calculations, however thoroughly they have been prepared. Let’s remember, whether HMRC admit it openly or not, they have internal targets to meet and their primary function is that of ensuring that UK tax payers are paying the correct amount of tax – they are on the war path and their job is to scrutinise so they can and will go the extra mile to prove someone at fault, Especially as HMRC now have a lot of tools at their disposal that allow them to be more strategic in their targeting, highlighting those returns where results are more viable. At the very least, even if they find absolutely nothing, a tax inspection is a time consuming hassle and worry that if it can be avoided, then should. And ignorance is not bliss – innocent mistakes are not just a case of forgive and forget and will be treated (broadly) in the same way as tax evasion carried out with intent. Therefore, the only way to minimise your risk of being one of the 250,000 enquires a year is to understand as best as possible how the investigation selection process works and keep between the lines.

What triggers a tax investigation?

Both large and small businesses are at risk and HMRC make this clear that everyone running a business should be concerned. 7% of tax investigations are selected at random so technically HMRC are right; everyone is at risk. In reality though most inspections occur when HMRC uncover something is wrong. With tax returns now being filed electronically, analysing certain criteria that could be deemed as “suspicious” is just the click of a button away. As a very general rule, HMRC are looking for unusual activity year on year or unusual against industry standards. For example:
  • If profits or drawings are low, how have you lived?
  • If money was introduced to the business, what was its source?
  • If any expenses are unusually high or vary significantly from previous periods, why?
These are just a few simple approaches HMRC take but you can see it is logical; it makes sense to raise eyebrows. If you have only taken £5k from the business in a year, yet you have a mortgage and 3 children to feed, how is this possible?

Other key triggers include:

  • Informers – jealous neighbours, disgruntled customers, ex-employees and other people out to get you, can just simply inform HMRC
  • Other tax payers returns – everything is matched on HMRC systems so if you claim for an expense in your tax return, someone else needs to have accounted for the income. This balancing system can catch many people out when HMRC start investigating the detail.
  • Consistently late filing of tax returns and payments

What actually happens in a tax inspection?

When given a notice that your business is under investigation, you will unfortunately not be told whether it is at random (at which you may be able to breathe a small sigh of relief that they haven’t actually found anything specific) or if it is fact relating to a particular “suspicion”. You will not have insight into information they have already gathered so this in itself can be rather daunting.
  1. You will be told though whether the investigation is into just one aspect of your tax return or a full enquiry.
  2. Paperwork will be requested to support the calculations after which you or your accountant, if they are representing you, will be asked questions and be expected to reply in a set timeframe.
  3. Once HMRC are happy they have the information they need they will conclude matters but this process may take, weeks, months or even years, especially for full enquiries.
Typically one year is investigated but if suspicious activity is uncovered, HMRC can go back up to 20 years, although 6 is usually the norm. Similarly “aspect enquiries” can turn into “full enquiries” should HMRC want to dig a bit deeper.

What are the consequences?

Well realistically very few investigations for small business owners result in imprisonment however, up to 100% of the tax due can be issued as a penalty in addition to the tax payment. In addition, HMRC do not have to “prove” only “suspect” that actions in one year may have happened in previous years. For example, missing income of £1,000 in one tax year can be “assumed” to have happened for the previous 5 years and the tax and penalties and interest applied thereon. If innocent mistakes are made some leeway may be given for any penalties but it is often at the discretion of the inspector in charge.

Read Part 2 to see how to minimise your risk of a tax investigation

Need help with your tax planning?

Give Figurit a call. We can help you plan, to get yourself in a good position – with some room for flexibility – for optimising your business and personal finances. For help with business or personal tax planning, call Figurit (formerly known as Lansdell & Rose) on 020 7376 933 or complete the form below.

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