HMRC will investigate in detail and retrospectively based on the case and how serious it is. If they suspect deliberate tax evasion, they can investigate as far as 20 years. Investigations into careless tax returns can go back 6 years and investigations into innocent errors can go backup up to 4 years.
If someone is thought to be evading payments- either accidentally or purposely a tax evasion will be launched to reclaimed owed money, and culprits will be subject to HMRC tax investigation penalties for failing to follow rules.
HOW LONG DOES A TAX INVESTIGATION TAKE?
Depending on the complications and the severity of your case, a tax investigation with HMRC can last several months after receiving that first letter. The size of the business plays a big part too. Large businesses are turning over higher amounts usually take much longer to resolve compared to a one-person limited company. The average time to get to a resolution for one aspect of taxation is a small case- between 3-6 months. A full tax investigation can take up to 18 months.
WHY HMRC WOULD INVESTIGATE ME?
Anybody who earns is required to pay tax. If you are an employee, your employer will take care of all your payments for you-removing what you owe HMRC from your wages and sending to the taxman. If you earn money outside of regular employment- you work for yourself, operate your own company, rent out a property, or make profit selling assets- you will need to file a Self-Assessment.
The online Self-Assessment tax return deadline is 31st of January, your form must be an accurate reflection of your earnings across the previous tax year. If HMRC believe there are errors or discrepancies, they may launch an investigation into your tax return.
WHATS INVOLVED IN A TAX INVESTIGATION?
At first, HMRC will send you a letter informing you that they are looking into your tax submissions. They may do this because they have spotted error, looked up some inconsistent figures or receiving a tip-off from an anonymous source that you may be underpaying.
You will be asked to present several documents during the investigation, including bank statements, invoices, expense receipts and quotes from the third parties, all of which can help HMRC determine whether you have committed an offence. HMRC has the power to reopen previously settled tax returns if an investigation unearths puzzling results. In normal cases HMRC investigation time limit is 4 years, in which they can go back to claim money from taxpayers.
If someone has been visibly careless HMRC can go back 6 years. For alleged deliberate tax avoidance, they can delve into 20 years’ worth of tax returns to find out what they are looking for, so if you are thinking of closing a limited company and starting a new one, it may be best to reconsider your options.
HOW DOES HMRC OBTAIN THE INFORMATION TO SUPPORT DISCOVERY ASSESSMENT?
HMRC use their information gathering powers in Schedule 36, Finance Act 2008 to support their investigation. The important point to note is that no time limits apply to how far back they can request information.
WHAT IS AN HMRC TAX INVESTIGATION?
HMRC has the right to check your affairs at any point to make sure you are paying the right amount of tax. If your business is selected, you will receive an official HMRC investigation letter or a phone call where they will tell you what they want to look at.
This may include things like:
- The tax that you pay
- Your accounts and tax calculations
- Your Self-Assessment tax return for a given year
- Your company tax return
- Your PAYE records and return if you are an employer
- Your VAT returns and records if you are VAT registered
TYPES OF TAX INVESTIGATIONS:
1. FULL ENQUIRY
During a full enquiry HMRC will review the entirety of your business records, usually because they believe that there is a significant risk of an error in your tax. In investigations into limited companies, they might look closely into the tax affairs of company directors as well as the affairs of the business itself.
2. ASPECT ENQUIRY
As the name suggests, during an aspect enquiry HMRC will look at a particular aspect of your accounts, for example, inconsistencies in a section of a recent tax return.
3. RANDOM CHECK
Just as it sounds, random checks can happen at any time – regardless of the state of your accounts or whether you have triggered an alert.
WHAT TAXES CAN COME UNDER SCRUTINY?
Many people think that tax investigations are limited to Income Tax, but this is not the case and HMRC can look closely at a variety of things including:
- VAT
- Corporation Tax
- Capital Gains Tax
- Construction Industry Scheme
- IR35
- Any other tax
If your business has complicated tax affairs it is worth investing in a good accounting software package to help, make sure your accounts are in order.
You cannot always avoid a tax investigation: your accounts may simply be selected at random for investigation, even if your books are in order and you always file tax on time. The tidier your books, the quicker and less painful the tax audit will be.
