Many taxpayers worry about being investigated, even if they know they have done nothing wrong and turned in an impeccable tax return or annual accounts.
That is because HMRC does not need a reason to open up an inquiry into your business or personal tax affairs because their investigations are randomised. This means anyone is at risk of an investigation at any time – and the costs involved.
However, while investigations are challenging and frustrating because of their random nature, there is no need for them to be a nightmare.
What happens during a HMRC tax investigation?
You will first learn of HMRC wanting to investigate your tax affairs through an information notice, which it will send to you or your accountant.
The notice will include the type of investigation they will do and the areas of the business under scrutiny, such as:
- self-assessment tax returns
- PAYE records
- company tax returns
- accounts and tax calculations
- VAT returns.
Tax inspectors will then review your records and accounts in detail, and may question you about your income and expenditure face-to-face or over the phone.
They are also likely to ask to view your bookkeeping records and search through any information that is relevant to their investigation.
HMRC is allowed to liaise with third parties and employees to review your affairs.
Once the tax investigation has concluded, HMRC will inform you of the outcome at which point any discrepancies will be explained and penalties charged.
HMRC tax investigation penalties
Of course, we doubt you will have done anything fraudulent on purpose, but because penalties can be applied retrospectively for mistakes as well, you need to understand how HMRC works them out.
First, you may be charged a penalty if HMRC finds your tax return or another tax document has been unpaid, understated, over-claimed or under-assessed.
If there is a mistake on your documents, HMRC will charge a different penalty that is a percentage of the tax is due, depending on three scenarios:
- if a penalty arises because of a lack of “reasonable care”, the penalty will be between 0% and 30% of the extra tax due
- if the error is deliberate, the penalty will be between 20 and 70% of the extra tax due
- if the error is deliberate and concealed, the penalty will be between 30 and 100%.
HMRC also takes into account whether it was HMRC or you that prompted the investigation when applying a penalty, leaving us with these penalty ranges:
| Behaviour | Penalty range if you notify HMRC of the problem | Penalty range if HMRC discovers the problem |
| Careless | 0% – 30% | 15% – 30% |
| Deliberate but not concealed | 20% – 70% | 35% – 70% |
| Deliberate and concealed | 30% – 100% | 50% – 100% |
Exactly where in the range your penalty will be depends on whether you assist HMRC in its investigation by disclosing the error, helping the tax authority work out what you owe and giving HMRC access to your documents.
Tax investigation service
Because HMRC can carry out random tax investigations and no one in the UK is safe from one, it is in your best interests to prepare for one by looking for a tax investigation service that will work for you.
HMRC tax investigations are costly, even if you successfully defend yourself against HMRC, so the best thing you can do is keep things moving quickly.
At Coveney Nicholls, we have represented countless clients during tax investigations to keep their costs down and reach a swift resolution.
That said, the best defence against an investigation is to ensure your tax returns contain no mistakes that will attract the attention of HMRC in the first place.
But, because you could be randomly investigated at any time, talk to us today to discuss tax investigations in more detail.