Avoiding an HMRC enquiry
With the implementation costs for HMRC's Making Tax Digital running over Budget, there is mounting pressure on the government to increase tax receipts into the Treasury. Aside from the harsh new penalty regime for non-compliance, HMRC are also refocusing on tax enquiries. In this article we're going to suggest some ways you can increase your chances of avoiding an HMRC enquiry.
Whilst there's no bulletproof method of avoiding an HMRC enquiry, there's certainly some steps you can take to make your life easier and lower the risk of an HMRC investigation.
Ensure you meet HMRC compliance deadlines
Perhaps the most obvious way of avoiding an HMRC enquiry is to file your tax returns and pay any tax due on a timely basis. Whilst it can be a chore dealing with your tax return, and let's face it nobody likes paying their taxes, it doesn’t get easier if you leave it to the eleventh hour. In our opinion, if you have a poor track record of tax compliance with HMRC this is likely to be a proverbial red flag to HMRC and make an enquiry more likely.
Review income/expense ratios
HMRC have previously used their Business Economic Notes (BEN's) and Tactical Information Packages (TIP's) as guidelines. These would typically cover income/expense ratios for various sectors, enabling HMRC to consider any anomalies which were outside the usual parameters and where opening an enquiry might be appropriate.
Unfortunately these publications have now been archived, so it's not easy to gain insight into HMRC's approach to profit anomalies. However where there is a trend which points to an unusual profit ratio, HMRC will have a suspicion that costs may have been included incorrectly. For example sundry expenses that are personal costs etc.
Keep accurate records
If you maintain meticulous and up-to-date records of all your financial transactions, including income, expenses, and deductions you're far less likely to come unstuck with HMRC. Well-organised records provide a clear trail of your financial activities, making it easier to respond to any HMRC enquiry with accurate information.
Ensure your information is complete
Along with keeping accurate financial records it is obviously important to file complete information within your accounts and tax returns. This means checking the information you supply to your adviser carefully to ensure nothing has been omitted. Examples of typical errors that are made are omitting details of child benefit claimed, student loans and interest received on bank accounts.
Review for yearly consistency
One of the checks that the HMRC's IT system is set up to search for is unusual trends in income and expenditure on a yearly basis. Whilst frequently there may be year on year profit fluctuations in your business, anything that is exceptional may be considered worthy of further examination. So ideally you should have a consistent yearly pattern. Where your profits deviate significantly from the usual norm, then the rationale for this should be properly documented.
Use Reliable Accounting Software
Utilise reputable online accounting software to track your finances - for example FreeAgent or Xero. HMRC consider the bank as the primary source of a business's financial records. Most online software operates using direct feeds from your business bank account. This can therefore help minimise errors and improve the accuracy of your financial reporting generally.
Make a detailed disclosure - where appropriate
There are sections in the tax return itself, to allow for further written clarification of any unusual or one-off transactions included in your return. A good adviser will know what transactions require this form of disclosure and then provide suitable wording to enable HMRC to understand matters.
As mentioned previously HMRC's systems are programmed to spot anomalies or fluctuations in a tax return which has been submitted to them. However, as a general rule before a full Enquiry is launched, HMRC will undertake a manual review of a tax return to look for obvious explanations causing HMRC's computer to focus on your tax return. The correct disclosure of any anomaly on your tax return might prevent the start of an HMRC enquiry into your tax affairs.
Avoid submitting an amended tax return - where possible
Once a tax return has been filed, try not to revise the tax return unless there is a significant tax impact, avoid adding in trivial amounts of extra expenses, for example. Once the original submission has been made. HMRC tend to look more at amended tax returns because they feel there is an increased risk of error than in a return that didn’t need to be amended. However we would stress that an amendment of tax return in isolation is unlikely to prompt an HMRC enquiry.
Try not to use estimated figures
Although the tax code in the UK is well regimented compared to some other jurisdictions, HMRC are pragmatic and do recognise that estimates and judgements are necessary on occasion. However, these estimates should always be of a ‘reasonable’ nature, which is where a good adviser can proverbially apply the brakes.
If you do get an enquiry try not to get another
If you do receive a tax enquiry notice from HMRC it's good practice to respond promptly, provide all the information requested, and answer any questions in a straightforward manner. If it's handled correctly, it’s unlikely that HMRC will raise a subsequent Enquiry for a long time, HMRC are unlikely to target you again unless something changes significantly.
Conversely, if the Enquiry goes badly, HMRC can charge additional tax, interest, and punitive penalties (especially if you're deemed to be non-cooperative during the Enquiry). If it goes particularly wrong you might be placed on HMRC's ‘Managing Serious Defaulters’ programme, HMRC can then ‘enquire’ into every filing you make for 5 years. This should therefore be avoided if at all possible!
Use an adviser
Last and by no means least, using a suitably qualified adviser to handle your tax return is likely to reduce the risk of an enquiry. Presumably HMRC take the view there is less likelihood of errors, omissions, unexplained unusual items etc when your tax return is prepared by a professionally qualified accountant or tax adviser!
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