An investigation notice from HMRC is surely not pleasing news for any business or entrepreneur. The stress of their procedure and consequences often concerns people.

But it should not worry you as long as you are aware of what they are going to do in their investigation, which depends on the type of enquiry they want to perform.

It can be any one of the following:

• Full enquiry: The HMRC performs full enquiry when they come to know about a significant risk of errors on your tax returns. They will audit and review all records, including the personal financial records of the directors and business owners.
• Aspect enquiry: This type of enquiry involves reviewing a specific area of your accounts and usually focuses on highlighting a mistake or misunderstanding instead of pointing out a deliberate attempt to evade tax.
• Random enquiry: It is a full enquiry performed randomly by HMRC to check if you have filed your tax return as required.

Moreover, HMRC civil tax investigations are not limited to Income Tax only. HMRC checks various other things that you should be aware of. For example:

• VAT
• Corporation Tax
• Capital Gains Tax
• Construction Industry Scheme (CIS)
• IR35

Usually, HMRC intimates you in advance the type of enquiry they want to conduct. Also, they request the place to visit you, which can be your home, office, business premises, accountant’s offices, or can request you to attend a meeting in a local tax office.

You are given an opportunity to accompany a legal adviser or accountant to the discussions.

HMRC provides you the right to choose your convenient time and schedule the meetings accordingly. You can postpone a meeting by showing valid reasons, such as serious illness or mourning of a close family member. It is only if you ignore a notice or deny a visit, HMRC will issue a penalty. 

Types of Documents Reviewed

During the investigation launch, HMRC will ask for a range of records and documents to check. However, they will inform you or your accountant in advance of the set of records they want to check. Those documents may include:

• Documents related to tax you have paid, which can be income tax or corporation tax.
• Accounting books and tax calculations details for the given years.
• Record of annual returns, if the investigation is launched for a Limited Company
• Documents related to your Self-Assessment return, if the investigation is conducted for a sole trader. In a Limited Company, HMRC may ask to see Self Assessments for company directors.
• Record of the PAYEE, if required.

Possible Consequences

HMRC will write to you the explanation of their findings. There can be two possibilities after the HMRC’s investigation is over:

• If HMRC detects any mistake in your returns but concludes that those errors were not deliberate, they will guide you on how to fix them. You get a total of 30 days to correct the mistakes. If you do not do so within the given timeline, HMRC will correct the return itself.
• If HMRC finds out that your mistakes are the result of fraudulence, they will charge you with penalties, extra tax, and interest. If you sign the contract to pay the penalties, HMRC waives its right to prosecute.

Summary

Handing HMRC investigations is not easy. Hence, the assistance of a reputed, experienced, and expert legal tax adviser is highly recommended. Doing so will minimize the stress and possible penalties.