Managing Your Cash Flow

How to reduce the risk of a tax investigation

4 min read

29 October 2015

HM Revenue and Customs (HMRC) is cracking down on tax dodgers by increasing the amount of investigations launched into UK businesses. Here is how you can reduce the risk of a tax investigation of your business.

In 2014, these efforts secured £23.9bn in additional tax revenue. With the governing body increasing the number of investigations carried out, it has become more important than ever to ensure your business follows HMRC regulations.

When a business shows a discrepancy in its accounts, it is commonplace for the HMRC to launch an investigation as to whether someone in the company has made a common mistake, or are committing tax fraud.

To reduce the risk of your business experiencing an expensive and time consuming investigation from the HMRC, follow these simple rules.

File your tax returns on time

Possibly the most effective way of avoiding an investigation is to file your tax returns on time. 

The HMRC tax return deadlines are as follows:

  • Paper tax return: midnight 31 October
  • Online tax return:  midnight 31 January

By failing to meet the given deadlines, not only will your business incur a penalty, but the HMRC are more likely to investigate.

TOP TIP: Use the blank space in your tax returns to expand on any inconsistencies. Anomalies such as big variations in turnover or profit can arouse suspicion.

Pay any tax owed on time

Just as important as filing your tax return on time, you should ensure that any tax you owe HMRC is paid no later than midnight 31 January. 

When paying your tax, always allow three working days for your payment to be processed in order to avoid a late penalty fee.

Maintain accurate and up-to-date records

Ensure you keep clear, concise records of your finances. This way, if the HMRC asks any questions, you’ll be more than well equipped to answer them. 

You should always keep hard (paper) and electronic copies of the following:

  • Invoices
  • Receipts
  • Mileage records
  • Wages book
  • Business bank statements
  • Relevant business documents, such as shareholder certificates, etc.

It’s also recommended that you keep a backlog of your accounts for up at least six years in the event that HMRC request to see past records.

TOP TIP: Schedule time once a week to create backups of your documents in both hard and electronic forms. This way your records are always kept up to date and if the original copy is lost or damaged, you will always have a spare.

Be honest

The best way to reduce the likelihood of a tax investigation is to simply be honest and open with HMRC. This means no concealing of information, no half-truths and no illegal tax avoidance tactics. This way, you know your business has nothing to hide should a random investigation come your way.

Seek advice from an accountant

If you are ever unsure about the issues surrounding tax, accounts, investigations or HMRC, you should always ask a chartered accountant for their advice. 

They are experts in spotting small details which may trigger an investigation, and can help reduce the chances of your business attracting the attention of HMRC.

Typically, HMRC will only investigate your business if it demonstrates suspicious activities, such as an unexpectedly high turnover. However, if you explain your circumstances in an honest way, your business is less likely to come under investigation. In the event that you are randomly selected for a tax investigation, you can sleep at night knowing that you and your business has nothing to hide.

Kim Holden is a partner specialising in commercial fraud and business crime at Burton Copeland criminal defence solicitors.