You may trigger a tax investigation from HMRC if you don’t pay taxes on time, there’s a significant error in your tax returns that need correction or you are involved in tax avoidance and evasion. These things may arouse HMRC to dig deeper into the tax affairs of an individual or a company. Broadly, HMRC does it as part of its major strategy to minimise tax avoidance. With various departments, thousands of different cases, and the scope and volume of paperwork involved, it may be difficult to understand how long does a tax investigation take. Before we delve deep into the topic, let’s start with what actually a tax investigation is?
What is HMRC Tax Investigation?
HMRC can review your tax affairs anytime to ensure that you are paying the right amount of tax. Before doing a tax investigation, HMRC may call you or send a letter informing you that what they want to look at. These aspects may be:
- the taxes you pay
- the Self-Assessment tax return for a specific period
- the tax return of a company
- your accounts and tax calculations
- your PAYE records and returns ( if you are an employer)
- your VAT returns and records (if you are VAT-registered)
Typically, there are three levels of audit or tax investigation that HMRC may take:
- Full enquiry: Here entirety of your business accounts is reviewed by HMRC
- Aspect enquiry: In aspect enquiry, HMRC will check a particular aspect of your accounts.
- Random check: HMRC may also do a random check anytime, without considering the state of your accounts.
Tax investigation is more than just investigating the income tax of an individual, it also investigates:
- Landfill tax
- Capital Gains Tax
- Climate change levy
- Insurance premium tax
- Corporation Tax
- Construction Industry Scheme
- IR35 and so on
What Triggers a Tax Investigation?
Most often, you may trigger a tax investigation from HMRC, if you are submitting an incorrect tax return, claiming more VAT as a small company or if you are a large enterprise and declare a small amount of tax. In addition to these, similar cases will be flagged up by HMRC to carry out an investigation. Furthermore, these things may also lead you towards a tax investigation:
- HMRC gets a tip-off
- you work in a high-risk industry (involving a lot of cash in hand transactions)
- you are frequently filing the tax returns late
- your income falls to a great extent, your costs increase or there are inconsistencies between different returns
- your accounts are not matching the industry norms
- you are in an HMRC target sector
How Long Does a Tax Investigation Take?
The quick answer is it depends on individual circumstances. There is no defined timeline for a tax investigation. It varies based on the complexity of the matter, the intensity of the tax evasion and the business size. It can be for a week or two or can spread to years. Generally, the full investigation- being complex- takes at least a year and can prolong as per the complexity of the case.
The aspect investigation- where a particular aspect of accounts is being investigated- takes around 3 to 6 months. The random check can take around 3 months. Remember, the longer the duration of a tax investigation, the more costly it becomes.
How Far Back can HMRC Investigate?
Here is the table to see how far back can HMRC investigate your case:
How to Reduce the Chances of HMRC Tax Investigation?
Here are the tips, you need to follow to reduce the chances of HMRC tax investigation:
- Make sure that you have submitted your returns accurately and on time
- Keep track of your expenses, income and taxes paid as an evidence
- Inform HMRC about a change, before it asks you
- Get help from our qualified accountants
Quick Sum Up
That’s all about HMRC tax investigation, factors that trigger it, how long does a tax investigation take and how you can reduce the chances of being investigated by HMRC. To be saved from a tax investigation, you need to be compliant with the HMRC tax laws and pay the due taxes on time. Keeping tidy, up-to-date financial records will not only prepare you for an HMRC audit but you can better evaluate the financial position of your business on a daily basis.
If you are earning a large amount as an individual or a business, you may find it difficult to keep track of your finances. We will handle your accounting and tax matters with HMRC accurately and on time reducing any possible chances of HMRC audit. So, contact our qualified accountants to take the financial burden off your shoulders and focus on growing your business.
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Disclaimer: This blog provides general information on the HMRC tax investigation.