HMRC Tax Investigation and How Far Back Can HMRC Investigate

Whether you are a small or large business, making sure you pay the appropriate amount of tax is important. Many will try to reduce their tax burden using legal allowances but getting it wrong can have major consequences, even if it’s by accident.

While you may think the tax man won’t have any interest in you or your business, the truth is that there is likely to be some sort of investigation if there is a suggestion that you are evading tax either accidentally or purposefully. 

How Likely Are the HMRC to Investigate?

Just because you are a small business or single trader, it doesn’t mean you are less likely to be checked out by the HMRC. Even if you are regularly employed by someone else but do a little extra work on the side for yourself, you are still obliged to fill out a self-assessment and pay tax on what you earn.

How Will I Know That I Am Being Investigated?

The first you learn is when the HMRC sends an official letter stating that your tax affairs are being investigated. You might at this time be asked to produce several documents, including bank statements, receipts for expenses and invoices. You cannot afford to ignore this request and it’s important that you comply and cooperate as much as possible.

How Far Back Can HMRC Investigation Go?

This can depend on what the HMRC are investigating. Normally, they will look to go back over the last four years of returns and take a close look at these. If you have been relentlessly careless in your accounting, they may well go back 6 years.

If there is evidence that you have been wilfully evading tax on a regular basis, however, they can go back as far as 20 years. It all depends on the circumstances.

What Triggers HMRC Investigation?

HMRC does carry out random investigations and it might just be that you have been chosen for closer scrutiny in this instance. If you have not made any mistakes or have not been involved in evading tax, there is usually nothing to worry about.

There may be other reasons why you are being investigated, however. These could include:

  • Someone in your business or who has dealt with you has alerted the HMRC to potential tax evasion. This could happen, for instance, if you only operate a cash-only business where it’s difficult to track payments.
  • The HMRC won’t be too concerned with one or two mistakes on your tax return. But if these are reoccurring regularly, it may send a warning sign that you are trying to evade tax.
  • If the margins for your earnings fluctuate dramatically, this can be another sign that things are not quite as they seem according to HMRC. Most businesses will not earn the same each year but if your profits take a sudden hit you may need to explain why.
  • Another warning sign may be that you have been running a business for several years but have yet to break even. Unprofitability is a sign that you could be cooking the books and are not honest about your revenue.
  • The HMRC will also look at tax returns in relation to the industry standard. For instance, if you are freelance writer, you will generally not be earning in excess of £100,000. A sole trader who is only earning £10,000 a year may seem reasonable but a limited company that is pulling in just the same amount might seem more suspicious.
  • You might be a case for investigation if your directors are earning less than the employees – it could suggest that some creative accountancy is going on. You may omit payments from companies in return for services that you have supplied.

What is the Outcome of any HMRC Tax Investigation?

First, it’s important to make sure that you have all your accounting in good order once you file your tax returns. A lot will depend on what the inspectors are investigating. You may end up with having to pay back a certain amount of tax because of errors. You might even end up getting a refund for overpaid tax if you are lucky.

If you are guilty of deliberate wrongdoing, however, you can expect to get at least a fine depending on the amount owed. You may also end up with a criminal conviction in more serious cases.

When Does the Investigation End?

This happens when you either receive a decision notice where HMRC inform you of what the final settlement is or a contract settlement, which is an agreement where you pay a certain amount back.

Tax Accountant can help with HMRC Investigations

If you have received letter for compliance check, VAT Inspection, Foreign Property Income, Code of Practice 8 Investigation or Code of Practice 9 Investigation; we have experts who can help you and save on penalties and taxes.