Contractors Tax Investigations
Our specialist tax advisors has represented countless contractors subject to tax investigations. Call our office to discuss your case.
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A contractor tax Investigation is generally triggered for two reasons; the first is a relatively routine random selection orchestrated by HMRC as a form of spot-checking. The second is where HMRC has been alerted to potentially suspicious activity within your limited company. Since most self-employed company owners must provide their own resources, instances where the company has declared a low turnover and a low amount of expenses yet yield a high dividend alerts HMRC to potential misrepresentation of status. If HMRC selects you for an IR35 investigation, it is crucial to have an expert tax accountant review your company’s expenditure, highlighting any possible reason for an investigation. As a specialist accountant, we can represent you in any instances where HMRC has started any compliance check or investigation. In some cases where HMRC contacts you concerning employment status, they can accept an explanation letter as to why you are classified as self-employed.
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A few common triggers may prompt HMRC to open a tax investigation into a contractor’s affairs. These include discrepancies between declared income and lifestyle, tips from the public, random selection, and connections to known tax avoidance schemes. Contractors who operate through personal service companies are also at higher risk of being investigated.
The process typically begins with HMRC issuing a formal notice to the contractor stating they will investigate their tax affairs. They may request documents like accounts, invoices, bank statements, etc., to review. There are usually meetings and interviews to ask questions. It can take many months to conclude. HMRC will either close the enquiry without further action or issue a tax assessment if they believe more tax is due.
You need to provide all business and personal financial records requested that are relevant to the investigation. This may include accounts, invoices, contracts, receipts, bank statements, credit card statements, mortgage/loan details, asset records, payroll information, etc. Having thorough, accurate records will help demonstrate tax compliance.
You can challenge the relevance of some requests but cannot refuse outright. HMRC has legal powers to obtain records it deems necessary for the inquiry. Refusal can lead to penalties and draw out the process. However, discussing why certain requests seem disproportionate with your advisors can be worthwhile.
There are several potential outcomes. HMRC may conclude their enquiries and accept your tax return as correct. Or they may reject your return and issue a tax assessment charging additional tax, interest and sometimes penalties. There may be scope to appeal their findings or reach a negotiated settlement. In serious cases, HMRC could refer you for criminal investigation.
Preparation is key. Have your accounting records meticulously organised and retain documents for at least six years. Seek specialist contractor accountancy advice at the earliest opportunity. Cooperate fully with HMRC during the inquiry, but avoid volunteering unnecessary information. Answer questions transparently and honestly. Stay calm and patient throughout the process.
Making a voluntary disclosure can allow you to avoid higher penalties further down the line. Taking the initiative to work positively with HMRC often produces more favourable outcomes. An accountant can help you quantify any past unpaid tax and support you in approaching HMRC. However, seek advice first, as disclosures must be handled carefully.
Professional fees incurred defending an investigation are tax deductible as long as they are not linked to work dealing with prosecution or COP9. Maintain clear billing from your accountants, distinguishing between compliant tax advice and investigation defence work.
There are no fixed timescales. Simple cases could take 3-6 months, while extensive investigations involving offshore structures or suspected serious fraud could take several years. Maintaining a constant open dialogue with HMRC and your accountant will help progress toward resolution. Don’t let the process drag on unnecessarily.
Expect detailed questions on your business, income sources, tax records, personal finances, assets and lifestyle. Answer truthfully, but avoid expanding on the questions asked. Have your accountant attend to provide support. Listen carefully and seek clarification if you need help understanding. Don’t be obstructive; stand your ground if you disagree with accusations. Take breaks if needed.
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