13.04 – How To Survive A Tax Investigation
have little trouble from the authorities. However, serious penalties exist for tax misdemeanors, and you’re required to keep your accounts for six years. If tax authorities become suspicious, they can investigate past records up to six years if they suspect carelessness and up to 20 years if they believe there has been intentional filing of false accounts.
If you are found to have underpaid tax, you must pay the owed tax, plus interest, and a penalty of up to 100 percent of the tax owed. The main question will be whether you are intentionally evading tax, which is illegal, or avoiding tax, which is legal but may subvert the law’s purpose. The lines between these definitions can be blurry. A 2021 government research briefing estimated the cost to the Treasury from tax dodging to be over £6 billion a year, so HMRC is vigilant in their efforts to combat this.
A tax investigation can be triggered for various reasons, ranging from routine checks to more serious concerns. Here are some common triggers:
- Random selection: Some businesses are chosen for investigation randomly each year.
- Industry-specific investigations: Certain industries may be scrutinized more closely for various reasons.
- Significant changes in accounts: Major and unexplained changes, such as unusually high expenses, can raise red flags.
- Lifestyle inconsistencies: Reporting profits that don’t match your lifestyle can attract attention.
If a tax investigation is triggered, immediately seek professional advice from your accountant. It is also prudent to protect yourself against liability by obtaining insurance against tax, VAT, or NI investigations.
Steps to Take During a Tax Investigation
- Stay Calm and Seek Professional Help: Contact your accountant immediately. They can provide valuable guidance and representation throughout the investigation.
- Gather Documentation: Ensure that all relevant documents and records are organized and accessible. This includes income statements, expense receipts, and previous tax returns.
- Cooperate with Authorities: Be transparent and cooperative with tax authorities. Provide the information they request promptly to avoid further complications.
- Review Past Filings: Re-examine your past tax returns for any discrepancies or errors. If you find any mistakes, be prepared to explain them and provide corrective measures.
- Consider Insurance: Protect yourself against potential liabilities by investing in insurance for tax, VAT, or NI investigations. Membership in organizations like the Federation of Small Business (www.fsb.org.uk/tax-protection) can offer immediate professional support and protection for tax matters.
- Maintain Good Records: Keep detailed and accurate records of all financial transactions. Proper bookkeeping can prevent future issues and make the investigation process smoother.
- Understand Your Rights: Familiarize yourself with your rights during a tax investigation. Knowing what to expect and how to respond can help you navigate the process more effectively.
Membership in professional organizations and accounting partnerships can provide additional support. For instance, The Accountancy Partnership (www.theaccountancy.co.uk) offers free representation during a tax inquiry as part of their standard accounting package.
By taking these steps and seeking professional assistance, you can navigate a tax investigation with confidence and ensure compliance with all legal requirements.
