Being audited or as it’s officially termed – being under HMRC tax investigation is not something you’d want to ever go through. Not only is it a frightening experience for anyone, they are also expensive and time consuming.
Unfortunately you can’t eliminate the possibility of being investigated, however there are ways in which you can minimise this.
But what does it mean? What happens when you are audited? And what are the chances being audited anyway?
Here are some red flags that can trigger a government audit.
1. HMRC gets a tip off
Why would somebody tip off HMRC for a potential audit?
The most common reasons are:
- Unhappy acquaintances who may suspect dodgy activity
- The existence of a cash-only policy at your business
- Living a lifestyle beyond your supposed means
Make sure you don’t get your business involved in any dodgy deals, or anything suspicious. The risks are not worth it. It would seem unjust to spend money to fit the idea of your income if you receive money from elsewhere, such as inheritance, investments or trust funds. As for the existence of a cash-only policy, in today’s modern day, being able to accept card payments is not an expensive practice to introduce. It also removes that concern from suspicious clients.
2. Regular mistakes on returns
Making a mistake once on your tax return is not something you should worry about too much. They happen and HMRC understands not everyone is a tax expert. So it makes allowances and forgives these one off sins.
However, if you regularly make mistakes on your returns, submitting inaccurate figures or information year after year will make HMRC suspicious. They will cause investigators to start digging. If you’re making mistakes two years in a row, you should get help from an accountant to make sure things will go smoothly from then on – or fire your existing accountant!
3. Numbers fluctuate by large margins
It’s uncommon for businesses to have large fluctuations year on year. Say you’ve had a profitable year in 2015 making £10,000, but the next year the profit dropped to just £3000.
There could have been a perfectly sound explanation for this, but HMRC is going to notice.
To avoid an investigation, inform HMRC of the reason. While you’re writing your self assessments you can write notes about any of the information you are submitting. So tell them what happened. You were sick and had to cut down on your working hours, there was a lot less work, etc.
4. Years of unprofitability
So you’ve been in business for years, and still hadn’t turned a profit. If you’ve had a lot of investment carrying you through, this isn’t impossible. Years of unprofitability will certainly ring the loud bell at HMRC’s door. Again, our advice is to inform them of the reasons behind your unprofitability.
5. Your figures are inconsistent with industry standards
For most industries, HMRC generally has a pretty good idea of what you should be earning.
Example: It knows a local gardener is unlikely to be earning £500,000 a year. It compares the latest trends and patterns in particular business or profession and evaluates it against other available information.
So, if your figures vary from the industry profession standard wildly, eyebrows will be raised and HMRC tax investigations are unlikely to be far behind. So if you’ve recently signed a five year deal with a famous record company and have become an overnight singing sensation, you should definitely mention this on the note section of your next Self Assessment.
6. Omission of income
If your business involves working and engaging in transactions with other businesses, your fingerprints are all over their finances. This applies to banks and lenders on interest as well.
It’s important to declare all payments received.
Let’s say you failed to declare you were paid interest, and it comes up during an investigation from the company which paid you that interest – HMRC will not be happy about it and there will be an investigation.
7. You do not have representation
It’s always a good idea to have an accountant to double check your books. Like stated earlier, HMRC doesn’t expect you to be an expert on tax, but you need to be responsible enough to provide accurate books.
Having an accountant represent your business boosts your trustworthiness in the eyes of HMRC and reduces your chances of being investigated.