Are HMRC likely to investigate your business?

So, what causes a tax enquiry?

HMRC could look into your business for a number of reasons:

• Sometimes, good tax planning can cause one year’s results to look very different from another, and this may cause a red flag. If this is the case, it can be easily dealt with. After all, it’s your right to structure your affairs in a tax efficient way!
• Some tax claims will result in an enquiry, as HMRC routinely check taxpayer’s entitlement.
• Sometimes a routine VAT or PAYE inspection can give rise to further questions.
• Sometimes a enquiries can start for a more sinister reason – an aggrieved ex-spouse or employee may have reported something you’ve done.
• More significantly, HMRC compare ratios in some businesses to their industry standard. With Making Tax Digital on it’s way, this kind of analysis into your business will go to a whole new level, enabling HMRC to focus their enquiries on high risk cases.

Is your tax strategy risky?

You may have noticed several stories in the media in the last few years, outing companies and individuals whose tax schemes have caught the attention of HMRC. (Jimmy Carr has admitted that his involvement in a tax avoidance scheme row in 2012 could have ended his career).

The riskier areas of tax planning take advantage of loopholes and involve either offshore structures and/or a variety of ‘schemes’. Many of these tax schemes promote huge benefits, out or proportion to the money being generated or the cost of the scheme and claim very little risk.

There is still a small industry out there promoting these sorts of schemes but those who do only make their money when you sign up for it. Unfortunately, there are a number of things they very rarely tell you including:

• Most schemes do not work and usually fail in test cases against HMRC
• Sometimes the tax treatment if the case is lost is worse than if you had done nothing
• You may have to pay significant legal fees
• You could face a criminal conviction
• You could face publicity as a tax avoider
• Your scheme is never “approved by HMRC”
• you could be marked out as a high-risk taxpayer and be at risk of further enquiries in the future
• The risk is normally all your own and so-called “insurance policies” are not worth the paper they are written on if the promoter ceases trading when the scheme fails (as often happens)
• As a result of the Advanced Payment Notice rules, you’ll have to pay the tax upfront anyway.
• An enquiry of this nature can drag on for years.

Minimising the risk of an enquiry

Okay, so how can you minimise your chances of an enquiry?

You can take steps to lower the chance of an investigation into your affairs by:

• Keeping accurate and up to date bookkeeping and management information
• Filing all accounts, tax returns and other statutory paperwork on time
• Paying any tax liabilities on time
• Getting advice before any deadlines if you feel that they will not be met for any reason
• Getting advice on tax planning opportunities before taking any action
• Having a pre-year end meeting with your accountant