Everything You Need to Know About HMRC Tax Investigations

Everything You Need to Know About HMRC Tax Investigations

You’ll likely know about HMRC (His Majesty’s Revenue and Customs) if you’re a UK taxpayer. As well as being responsible for collecting taxes, they can investigate individuals and businesses for various reasons. This blog explains what triggers these investigations, how long they typically last, and the cost involved, helping you prepare and stay compliant. 

What Triggers an HMRC Tax Investigation?

Investigations are often triggered by specific factors or behaviours that raise suspicions regarding the accuracy and honesty of your personal or company tax returns. 

Common triggers include: 

  • Inconsistent reporting: Significant fluctuations in income or expenses without a clear explanation can draw attention. 
  • Cash transactions: Operating a cash-intensive business or failing to account for cash transactions properly can be a red flag to HRMC investigators. 
  • Offshore accounts: HMRC is increasingly focusing on offshore income and accounts, so failing to declare these can lead to an investigation.
  • Discrepancies in lifestyle and income: If your lifestyle exceeds your declared income, HMRC may question whether you’re underreporting your earnings.
  • Regular tax returns: Repeated errors, even if unintentional, can mark you out as one to watch. 
  • Tip offs: These are usually from disgruntled ex-employees or competitors. 

Another factor that puts you at higher risk of an HRMC tax investigation is the industry in which you work. Certain industries, including cash-intensive businesses like restaurants and bars, are known for higher risks of tax evasion or fraud. 

Lastly, changes in your lifestyle can raise red flags. If your reported income does not match your lifestyle – for instance, owning expensive assets or living in a luxury home on a modest income – HRMC might take a closer look at your finances.

What’s The Difference Between a Tax Investigation and an Audit? 

A tax audit checks financial records to ensure a business complies with tax laws. It also reviews tax returns to confirm that income, expenses, and credits are correctly reported and reported on time. 

In contrast, a tax investigation is a deeper probe triggered by suspicions of intentional tax evasion or fraud. It aims to recover unpaid taxes from previous years by thoroughly examining potential tax evasion cases.

For instance, a tax audit might review a company’s expense claims and deductions, while a tax investigation would investigate suspected deliberate manipulation of financial records to avoid taxes.

How Long Do HMRC Tax Investigations Take?

There is no set time for an HRMC tax investigation – each case will vary depending on its complexity. 

Simple investigations involving minor discrepancies or errors can often be resolved in a few weeks. However, more complex cases, particularly those involving suspected fraud or evasion, can take months or even years to conclude.

There are three main types of HMRC tax investigations:

  1. Full Enquiries: These are the most comprehensive and can involve a thorough review of all your financial records and tax returns for a specific year.
  2. Aspect Enquiries: These focus on specific areas of your tax return where HMRC believes there might be a problem, such as unexplained expenses or discrepancies in income reporting.
  3. Random Enquiries: As the name suggests, these are random checks, though HMRC typically uses risk-based assessments to choose who to investigate.

Typically, an Aspect Enquiry might take a few months, while a Full Enquiry can take over a year, especially if there are disputes or if the case goes to a tribunal.

How Much Does an HMRC Investigation Cost?

The costs associated with an HMRC tax investigation can be substantial – and can often be stressful for those involved. 

The total cost depends on several factors, including how complex the investigation is, how long it takes and whether you need to hire professional help.

Legal and accounting fees can quickly add up, especially in complex cases. Costs can range from a few hundred to several thousand pounds for more in-depth investigations. 

Be warned: the legal fees might not be the only costs you have to pay. If HMRC finds that you owe additional tax, you will also have to pay this amount, often with added penalties and interest. 

Conclusion 

By staying informed about HRMC red flags and ensuring you file your tax returns on time each year with all the relevant information, you can reduce the risk of a tax investigation. However, seeking professional advice early on can help mitigate the stress and potential financial impact if you do find yourself under investigation.

At 360, we offer a wide range of tax services, from tax planning, VAT, self-assessment, and HMRC investigations to trusts. We also offer tax investigation insurance to our clients which covers our fees for defending you (provided you have not committed tax evasion or fraud). Please contact us for further details.

We provide clear and timely tax planning advice to individuals and businesses. For more information,complete an enquiry form online, call us at 01482 427360, or fill out an enquiry form online.

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