How to avoid an enquiry by HMRC

What is an HMRC enquiry?

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HMRC has a duty to collect taxes and make sure the correct tax is being paid. If they suspect tax has not been paid or has been underpaid, they will want to investigate. Overall, there has been a rise in the number of HMRC enquiries in recent years as the Treasury attempts to proactively recoup money that is owed.

As a taxpayer and a business owner, it is your responsibility to make sure you are paying the correct amount of tax. You are expected to keep accurate records and submit tax returns on time. Having accurate and clear records makes it easier to respond to questions from HMRC, should they ever raise a query.

There are a number of different types of HMRC enquiry and investigation, and we won’t go into all of them here. However, we have put together some tips covering most of the key areas that impact our clients, to help you and your business stay on the right side of the taxman.

Stick to the deadlines

By filing tax returns on time and paying tax when it is due, you are demonstrating that your records are up to date and your affairs are in order. There is no benefit to be gained from leaving things to the last minute or filing and making payments after the HMRC deadlines. In fact, the sooner you can file a tax return, the earlier you will have a clear picture of your tax liabilities and any repayments that may be due.

Keep income/expense ratios under review

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HMRC monitors the income/expense ratios of businesses and may react to any unexpected profit ratios. Their concern could be that costs which are not legitimate business expenses may have been incorrectly incorporated. If you notice any anomalies in your regular reporting and financial reviews, make sure you question them and dig deeper. If you are satisfied that the blip is caused by legitimate business fluctuations, make sure you have evidence to support this. That way, you can respond quickly and honestly if HMRC raise a query. It is also worth reviewing annual income/expense at year end and comparing it with previous years, to check for any year-on-year anomalies.

Keep records up to date

At Wild & Co we believe strongly that well-maintained digital records of all transactions, including income, expenses and deductions, are at the heart of business success. We want to make sure our clients have clear visibility of their numbers at all times, not just when they are preparing their accounts at the end of the year. The key reason for this is that it makes it easier to forecast profit, manage cashflow and spot issues before they become a problem. It also means there is a clear trail of activity, so that you can respond speedily to any information requests from HMRC. Make sure you are inputting accurate information and providing a full picture to your accountant of all factors that might affect either your business or personal tax.

Maximise the benefits of your accounting software

We have spoken before about the benefits of digital accounting (read our article 6 Benefits of using a cloud accountant). It’s also valuable to explore all the ways your accounting software can support your business. As Xero Gold Partners we stay close to the latest Xero feature releases and make sure we understand how these can support our clients. New apps and updates are continually being launched that integrate with other cloud platforms and online tools, including ecommerce platforms like Shopify. When you are using your cloud accounting software and other online tools to your advantage, your whole business becomes streamlined and well-connected. This helps maximise productivity, minimise accounting errors and improve financial reporting – all of which helps HMRC gain a clear picture of how your business works, should they ever need it.

Accuracy and detail

If you have picked up any anomalies, as described earlier, it is helpful to disclose the reasons on your tax return. If HMRC picks up something unusual, they will usually check the tax return first before launching a full investigation, to see if there is an explanation. As a general rule of thumb, provide clarification if you think it might be needed and don’t leave anything to guesswork. Similarly, make sure you have included everything before your tax return is submitted, to avoid the risk of having to amend a tax return after it has been filed.

What to do if you face an enquiry

If you do receive an enquiry, always respond promptly and provide the information requested. Answer questions accurately and honestly. If you have followed all the steps above, responding to questions from HMRC should be straightforward.

If you would like to discuss any of the points raised in this article in more detail or want to understand more about HMRC enquiries and how to improve your record keeping and reporting, please get in touch with one of our team by calling 01423 222710.