Tax investigations: what to do and what not to do

More and more businesses now face tax investigations as HMRC is forced to reduce the current £40bn tax gap by £7bn in the next four years.

Over the last year, we have seen more new initiatives against tax avoidance such as the plumbers tax safe plan, the recent tax investigation into ebay traders and private tutors and now the HMRC Affluent tax team hitting second homes and offshore accounts. Those found breaking the laws face harsher penalties too.

HMRC are improving their systems and capturing more information to ensure they fill this tax gap. Since April 2011, all companies are required to submit accounts and tax returns in electronic (iXBRL) format. Using this information HMRC are able to compare results of individual companies with competitors, or with historical trends, to identify anomalies.

Businesses and sectors most at risk

We expect HMRC to target businesses perceived as high risk. Companies that persistently file late returns, or pay tax late without contacting HMRC to explain why, will attract unwanted attention.

In the eyes of HMRC, a business that submits returns late does not take tax compliance seriously, and represents ‘easy prey’. HMRC will also look at the sector in which the business operates, and from time to time, will target particular areas. Hotels and restaurants in the North West are currently in the spotlight.

How to reduce exposure

Tax investigation work is a specialist and time-intensive area. It often surprises people that dealing with investigations can cost considerably more than the fee for preparing the accounts under review.

Taxwise also represents a tactical advantage. Where HMRC inspectors know a company has Taxwise in place, they will appreciate that the business owner has the resources to contest HMRC arguments.

What to do if a tax inspector calls

The first step is not to assume HMRC has contacted us about the investigation or inspection. Call us before you do anything.

The next step is to prepare, and our specialists will be able to advise you exactly how. The first meeting with HMRC is critical: inspectors are very good at catching taxpayers off guard in a friendly initial meeting, and then using ‘throwaway comments’ as evidence to support ambitious tax assessments at a later stage.

If you know something is wrong, don’t try to hide it. An early, voluntary disclosure will reduce any final settlement with HMRC. Keep in mind that at the end of an investigation, a certificate of full disclosure must be signed, and HMRC will take statements.

Keep cool, stay focused

When HMRC start an enquiry or investigation, it is for a reason. It should not be assumed the enquiry is a random event. In practice, virtually all investigations are started because HMRC inspectors think there is tax at risk. Thumping the table will not persuade them otherwise – just the opposite.

The key is to identify the concerns and deal with them. That way, the case can be closed at the earliest possible opportunity.

You can find more information on our Taxwise scheme here. Please note that the policy does not cover cases of tax evasion or where there has been criminal activity.

For more information, including details of the full Policy Terms and Conditions, please contact us on 0845 365 1000 or email