What Triggers a Tax Investigation?

HMRC tax investigation

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Facing a tax investigation can be a frightening experience for any business owner or individual. To ensure you’re on the right side of HMRC and avoid potential issues, understanding the triggers for tax investigations is crucial. In this article, we’ll explore common factors that can lead to HMRC scrutiny and discuss ways to minimize the risk.

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Common Triggers for Tax Investigations:

Late or Incorrect Filings:

HMRC tax investigations often begin when individuals or businesses file tax returns late, pay taxes after the deadline, or make errors in tax return that require correction. To avoid facing a tax investigation, it’s essential to adhere to filing tax returns within the specified time limits, typically 30 days.


Inconsistencies in Returns:

Inconsistencies or substantial variations between different returns, such as a sudden fall in income or a notable increase in costs, can raise red flags for HMRC. Ensuring accuracy in reporting and explaining any significant changes in your financial records is key to minimizing the risk of an investigation.


Abnormal Business Costs and Offshore Accounts:

Business owners operating in high-risk industries or those with abnormally high costs for their sector may attract HMRC’s attention. Possession of offshore bank accounts and income from property are additional factors that could trigger an HMRC investigation.


Investments in Targeted Schemes:

Investing in schemes or funds viewed by HMRC as tax avoidance strategies is a high-risk activity. Businesses operating in industries HMRC has decided to target also face an increased likelihood of scrutiny.


Tip-offs and Random Investigations:

HMRC can initiate investigations based on tip-offs received from various sources. Additionally, random investigations are conducted each year to target tax evaders that are difficult to detect. Anyone, whether a private individual or a business owner, could receive a notification for a random enquiry.

Mistakes on Taxes and Audits:

HMRC conducts various types of audits, including mail, office, and field audits, to verify the accuracy of tax returns. 

Common Mistakes Leading to Audits:

Declaring too many deductions, failing to report certain income, making false statements, and using impermissible accounts are common mistakes that can trigger an audit. However, it’s important to note that an audit is not a criminal accusation; it’s an attempt to ensure accurate reporting.


Distinction Between Audit and Investigation:

While an audit aims to verify the accuracy of tax returns, a criminal investigation occurs when there’s an effort by HMRC to build a case against an individual or business. Criminal investigations often result from audits where intentional misreporting is discovered.

Criminal Investigations and Tax Evasion:

Initiation of Investigations:

Criminal investigations for tax evasion typically begin when an individual misreports income, credits, or deductions or fails to file necessary returns. These investigations often stem from audits revealing willful and intentional withholding of income and financial information.

Possibility of Criminal Conviction:

Taxpayers are prosecuted only when the HMRC finds intentional tax evasion. Making an honest mistake that prompts an investigation does not guarantee a criminal conviction, but it underscores the importance of accurate reporting.

HMRC's Commitment and Investigations:

HMRC’s Efforts in Combating Tax Avoidance:

In 2019/20, HMRC raised £5bn in additional tax by tackling non-compliance, prosecuting over 4,000 people. HMRC remains committed to combating tax avoidance and evasion.


Triggers for HMRC Investigations:

HMRC initiates investigations by cross-referencing filed tax returns with existing data. Discrepancies, such as a significant fall in income or unusual business costs, can automatically trigger an investigation.


Consequences of HMRC Investigations:

HMRC can request home visits, office visits, and information from third parties during investigations. The severity of the issue determines the level of scrutiny, and mistakes can lead to penalties. Cooperation with HMRC is crucial post-investigation, and taxpayers have the right to appeal if they disagree with the decision.

How to Reduce the Chances of an Investigation

Best Practices for Tax Return Filing:

Using good accounting and filing software is a preventive measure to avoid errors that could trigger investigations. Rushed completion of tax returns increases the likelihood of mistakes, so taking the time to ensure accuracy is essential.

Tips for Accuracy and Compliance:

Ensuring all details are accurate, providing required information, and avoiding claims for non-allowable expenses are crucial steps. Seeking help from reputable accountant service providers and filing tax returns on time can significantly reduce the chances of an HMRC investigation.

Cooperation with HMRC:

Cooperating fully with HMRC’s investigation is essential. Ignoring inspection or information notices can worsen the situation. After the investigation, HMRC provides findings, and taxpayers have the right to appeal if they disagree.

20 Ways to Reduce Personal Tax Bill

In conclusion, understanding what triggers a tax investigation is vital for any business owner or individual filing tax returns. By being proactive, maintaining accurate records checklist, and cooperating with HMRC, you can significantly reduce the risk of facing a tax investigation. Remember, the key is to pay the right amount of tax and avoid engaging in tax avoidance practices. Stay informed, stay compliant, and minimize the stress associated with HMRC investigations.

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