A Guide To Tax Inspections For SME’s

September 13, 2016 12:45 pm Published by

preparing for a tax inspectionThe prospect of an HMRC tax inspection can be a daunting one for businesses of any size, but particularly for SME’s who may not have an accountant. The most common investigations into businesses are in relation to fraud, tax evasion and payroll tax errors.

A recent study publicised by the ICAEW indicated that since a crackdown on payroll tax errors over half of all additional sums collected in penalties were incurred by small to medium sized businesses (SME’s), despite only making up 11% (£96bn) of total UK payroll.

But what can a business do to make an HMRC tax investigation less likely, and how can the business prepare when the tax inspectors do come calling?

What Might Prompt a Tax Inspection?

Whilst there isn’t much certainty around when an HMRC inspection will occur, there a few characteristics of a business that might make one more likely:

  • Accounting Errors – Should an error occur in a company’s statutory accounts or tax return, a visit from the taxman is much more likely to occur. They will want to check whether the errors have resulted in an incorrect tax bill, and to determine whether the errors were made in a deliberate attempt to evade tax.
  • Specific Industries – Some industries are more likely to be subject to a tax investigation, including businesses that are generally paid in cash such as fast food takeaways, barbers, taxi drivers or small businesses that are unable to accept other forms of payment. Another instance is when industries are seen as high risk for tax evasion, such as construction.
  • Exponential Growth – Growth is a great thing for SME’s businesses, but ‘overnight success’ resulting in a huge spike in turnover from year to year can make tax inspectors suspicious.
  • Location – You may be located in an HMRC target area, HMRC set up task forces in certain geographical areas that are deemed high risk.

Minimising The Possibility of an Investigation

Whilst it is worth noting some investigations are triggered at random, there are some things businesses can do to make an investigation less likely:

  • Accurate, honest reports – If a business files honest and accurate reports it will have much less to worry about. Ensure explanations of unusual balances and discrepancies are also noted. In the event that it is chosen at random for an inspection, having accurate reports will help clear things up quickly.
  • Promptness – Filing tax returns before the deadlines will reduce the chance of a tax inspection.
  • Review – Take the time to double check your reports before they are sent. Speak to an accountant if there are any unusual fluctuations or anomalies and don’t send them off if you think they could be wrong.

If your business is due to be inspected, you should ensure your bookkeeping and financial records including invoices, receipts and purchase orders are accessible and up to date.

 You will be contacted by HMRC before the inspection takes place with details of exactly what documents you will need to have available; don’t try to hide any evidence as this will elongate the process and likely produce the same result.

If you are in an industry that HMRC considers higher risk you may consider investing in investigation insurance.

What is Voluntary Disclosure?

The voluntary disclosure process involves the taxpayer reporting their own error or omission to HMRC before it is picked up by them. This is always recommended if you notice errors in your reports and spares the chance of a tax investigation followed by potential fines or even criminal prosecution.

How Far Back Can HMRC Investigate?

Technically, HMRC can investigate your record back 20 years. However, it is unusual for them to investigate further than 6 years back.

Can I Go To Prison For Tax Offences?

HMRC will prosecute any cases of deliberate fraud particularly in cases where large amounts of PAYE and VAT are concerned. Whilst it’s possible to be sent to prison for tax offences HMRC generally seek civil penalties in the form of a fine.

Always Be Prepared with First Call Financials

Whether you are an entrepreneur, small, medium or large business. We understand the challenges that can be faced by businesses, both in the start-up phase and beyond.

Our range of accountancy, tax and VAT, self-assessment and managed payroll services ensure that any mistakes that might bring your business to HMRC’s attention are eliminated. Give us a call on 0117 3790810 to discuss the best way forward for your business.


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This post was written by Steph Roffey

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