It is common knowledge that the UK Government have invested unprecedented amounts in order to support businesses and the economy throughout the pandemic. Whilst this spending has been met with justified praise, we haven’t yet been told how they are likely to recoup the money that they have borrowed. Many believed that March’s budget announcement would give us some clue, but the announcement was actually primarily concerned with committing to more spending. One way the government are likely to repay the money they have borrowed is through increased tax investigations. Bearing this in mind, now seems a good time to talk about what a tax investigation is and how to ensure you and your business are tax compliant.
What Is A Tax Investigation?
Fundamentally, a tax investigation is exactly what it sounds like. If the HMRC have reason to believe your accounts may be faulty they may decide to investigate you or your business to ensure you are paying the right amount of tax. The three types of tax investigation are as follows: aspect enquiry, full enquiry, and random check.
Aspect Enquiry
These are the most common form of tax investigations. This type of investigation entails the HMRC reviewing a particular area of your accounts where there are inconsistencies.
Full Enquiry
As with an aspect enquiry, a full enquiry type of investigation is exactly what you might imagine. If the HMRC believes there are significant problems with your payment of tax they may decide to carry out an investigation into all of your business records. This can sometimes include the affairs of the business director.
Random Check
These are rare, but simply occur when the HMRC does a random check of a business. You do not need to have been at fault in any way for a random check to occur. They are, by nature, random.
What Kind Of Errors Could Lead To A Tax Investigation?
Sometimes, a check may be nothing to do with your own accounts. It is not unheard of for the HMRC to investigate a particular sector or industry if they feel there is an usual amount of financial irregularities in the industry.
However, in most cases a tax investigation will be the result of inconsistencies in your tax returns or late and error-ridden submissions.
The HMRC also may have reason to suspect you of tax irregularities if they receive a tip off. The Level of suspicion they have can also result in a longer investigation. Usually, investigations will look at your tax records for the last 4 years, but if they are suspicious enough this can rise to 6 year.
Moreover, you should be aware that these checks are not reserved only for income tax. You can be investigated for almost any kind of tax, such as climate change levy or capital gains tax.
What Do The Investigations Consist Of?
The HMRC can check if you are compliant at any time and you are obliged to cooperate. However, you can appeal their decision if you believe that their justification is unfair, but it will be up to them to decide whether your explanation for whatever irregularity that was found in your accounts is sufficient.
They will inform you if you are facing an investigation, and essentially it will consist of a lot of dialogue between yourself and the HMRC as they audit your accounts. They will ask questions about your operations and accounts, so be sure to get your affairs in order once the procedure has begun.
The investigation can take up to 16 months. The investigation will end with a decision notice and if you are found to have errors in your account there will likely be a contract settlement.
Is An Investigation More Likely At The Moment?
The short answer is yes. As stated in the introduction, the Government’s commitment to recouping the costs of all the coronavirus support packages means that they will likely concentrate on finding tax that they are already owed. It is a known fact that the HMRC miss out on billions of pounds each year in tax issues.
In addition, the recent implementation of Making Tax Digital will make it easier for tax irregularities to be flagged up. Thus, it is more important than ever for you to ensure that your accounts are up to date and submitted on time.
What Our Experts Say:
While almost all high street stores have been suffering heavily due to lockdown measures put in place, eCommerce in Europe and UK enjoyed a massive growth during the pandemic as the forced digitization of retailers and consumers has accelerated the ecommerce. This strong growth has been seen from all major online marketplaces.
For ecommerce traders, Online Selling Compliance Check is the particular tax investigation that HMRC regularly conducts. We can also notice that all tax authorities from major ecommerce markets (EU and UK) have tightened their regulations to detect and diminish tax fraud and to level the playing field in the consumer goods sectors.
HMRC has powers to tackle hidden UK businesses which are trading via online marketplaces. If they can’t make contact with the online seller or those traders remain non-compliant, HMRC will notify the online marketplaces, who will be made jointly and severally liable for future unpaid VAT. In this case, the marketplace has the option to remove the sellers rather than be liable.
HMRC’s report shown that they have issued around 6,000 of these notices between September 2016 and 31st March 2019. Besides, around 65,000 non-EU based sellers applied to register for VAT and have declared around £250 million in additional VAT.
In recent years, HMRC has also expanded their powers to obtain data from third parties. This data will be used to undertake focused compliance activity, and this makes it increasingly difficult for a small minority of businesses to hide their online income deliberately.
Other EU tax authorities have a similar approach to cross border e-commerce business. EU will apply the Ecommerce VAT Package from July 2021, which will make the VAT compliance issues stricter than before.
Conclusion – Tax Investigations Imminent
Tax investigations cases can be extremely irritating and they are naturally complicated due to large amount of data involved, interlinked regulations and multiple procedures to process.
Should you face one, you will have to dedicate significant time and energy to cooperating with the tax authorities. This is why you must double check all your accounts and make sure you avoid simple mistakes that could trigger an investigation.
One way you can do this is by employing the services of a dedicated and experienced accountancy team; that’s where we come in.
At J&P, we have a team devoted to ensuring that you are always VAT compliant. We have strong experience in helping clients through tax investigations and our devoted team can guide you through the process every step of the way.
Please do not hesitate to get in touch should you have any concerns over your VAT returns, or you require assistance with a voluntary tax assessment to ensure everything is on track. You can contact us at compliance@jpaccountant.com, or give us a call on 0161 637 1080.
