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What to expect during the initial stages of a HM Revenue & Customs Tax Investigation

You might be one of the lucky ones or perhaps you’re just very thorough when it comes to your tax return. Either way, every small business owner in the UK wants to avoid a HM Revenue & Customs investigation at all costs – no pun intended. But what if the worst were to happen? What can you do to ease the pressure? Let’s take a look at what you can expect to happen if the dreaded notice ever arrives.

If you are a member of the Federation of Small Businesses, this is when we would recommend making a claim to the legal benefits policy team. 

What to expect during the initial stages of a HM Revenue & Customs Tax Investigation

Initial Proceedings

The first thing you need to understand about a tax investigation is this: you are innocent until proven guilty. Bear in mind though, HMRC do not have to provide you with the reason(s) behind the investigation and they have the right to look into any tax return that they feel does not quite add up.

Another important piece of information to remember is that HMRC may only conduct one enquiry per tax return, if there are multiple issues then they can all be addressed under this one enquiry.

In order to conduct an investigation, the inspector allocated to your case must formerly issue you with a notice in writing that states an enquiry is about to begin (Section 9A TMA 1970). If you have an accountant, then they will be contacted directly with any questions or stipulations the investigator has about your return. However, if you don’t have an accountant then the questions will be posed directly to you.

With this letter you will also receive: 

  • The HMRC ‘compliance factsheet’, which contains information needed in respect of the enquiry, such as your rights and what is to be expected of you for the duration. 
  • Information as to whether the enquiry is full or aspect.  A full enquiry requests the submission of all business records for the year in question. An aspect enquiry requires no meetings with the inspector and would be concluded fairly quickly. If the inspector finds multiple anomalies within the tax return, they may request that the enquiry is upgraded to full.

Information for Partnerships

If you run your business as part of a partnership, then you should expect notice to be sent to the nominated partner who should then inform the other partners. The law states that each of the partners tax returns fall under this one enquiry (Section 9A TMA 1970), so keep this in mind.

Information for Limited Companies

Similar to the above, limited companies must be informed of an enquiry in writing (Schedule 18 Para 24 Finance Act 1998). The enquiry extends to anything that is meant to be included within the return, but does not extend to the personal returns of any company directors. 

Records will be requested, these can include business banking statements, purchase invoices and petty cash books.

Random Enquiries

Don’t panic if you receive a tax investigation notice completely out of the blue. HM Revenue & Customs perform ‘spot-check’ enquiries, for every thousand tax returns HMRC receives they will perform one random investigation. This investigation will take the form of a full enquiry and will be carried out in the same manner as any other.

FSB Recommend

  • You should keep detailed records of all transactions made by your business
  • Set up a business bank account, allowing you to keep personal finances separate
  • File returns on time. If you are involved in an investigation then any documents that the inspector requests from you should also be sent off promptly to avoid additional fines

Unfortunately we won’t be able to cover your investigation if it began before you became an FSB member. To avoid a costly and damaging investigation we recommend that any small business owner signs up today. Simply visit the Join Portal.

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