It is estimated that approximately 7% of HMRC investigations are random, in order to keep business owners on their toes, but the vast majority of inspections are triggered for a specific reason, where HMRC thinks there is an issue.
Here are some of the reasons why HMRC could decide to launch an investigation:
Regular late submission of your tax return
If you are regularly late filing your tax return without an explanation this is going to flag up a potential problem to HMRC. Make sure you keep to deadlines.
Regular mistakes on your tax returns
One-off mistakes happen – after all tax returns can be complicated. However, if mistakes are happening on a regular basis HMRC are going to investigate further. Using an accountant should help to ensure your tax returns are completed accurately and correctly.
Fluctuations in your profitability
Naturally your turnover and profit figures will change year on year but drastic fluctuations will be picked up by HMRC. In particular, if your expenditure increases and income falls, this reduces your tax liability and is something HMRC will want to investigate. Make sure you add details to your tax return explaining any such discrepancies.
Your financial figures don’t match industry standards
If your business figures show you to be drastically under or over performing compared to similar businesses this is going to cause HMRC to take a closer look.
Not declaring all your income
This sounds obvious, but make sure you don’t overlook any sources of income, however small. Include income from, for example, sale of assets, rental of property, returns on investments.
Unjustified expense claims
Again this sounds obvious, but it is important that business expenses are legitimate and properly recorded. Keep accurate records and file copies of receipts.
Not making a profit
It is not uncommon for new business not to make a profit, or for established business to have a blip. However, if your business has been running for years and hasn’t yet turned a profit, this will look suspicious and HMRC will want to investigate how you are keeping the business running at a loss for so long.
Using an accountant is looked upon favourably by HMRC and can help to prevent investigations being triggered – as well as making your life simpler by letting an expert deal with your accounting and tax responsibilities.
If you would like advice about tax investigations, or about how we could help you in general, please get in touch with us on 01625 524 127.