As a sole trader, ensuring compliance with HMRC regulations is often cumbersome, especially if you file your taxes alone. Another burden is if you suddenly receive a notice of tax investigation.
Avoid being investigated and protect your hard-earned income with our comprehensive guide. Keep reading the whole blog to know more about it!
How to avoid HMRC Self-Assessment Tax Investigation – Sole Traders
What is an HMRC Tax Investigation?
A tax investigation is a right of His Majesty’s Revenue & Customs (HMRC) and is conducted to ensure you are paying the right amount of tax. They do this by checking your financial records and tax returns.
By law, you must cooperate when you receive an official investigation letter or a phone call from HMRC. HMRC will explain what they plan to check, which can be a specific part of your tax returns or a broader scope of your tax affairs.
What prompts an HMRC Tax Investigation?
To avoid getting investigated, you should first understand what triggers it. There can be several reasons why HMRC might want an investigation of your taxes, which are:
You omitted something or made a mistake
Even a small mistake can trigger HMRC to investigate, whether it is a tick box you forgot to click in your self-assessment return, incorrect figures, or inaccurate supplementary information.
HMRC now has a powerful and sophisticated computer system that automatically cross-checks your submitted tax returns to the existing data the system has from you.
You frequently file your taxes late
You have until the 31st of January to complete and submit your tax returns for the previous year. If you continually file your self-assessment tax return late, this can prompt a tax investigation.
There are inconsistencies and fluctuations
With the data tools, HMRC can check the variations in figures on your tax returns, so if they notice a considerable amount of fluctuations, they can check your financial records to confirm.
They can also investigate if you provide information different from the norms of your industry or sector type.
You are classified as suspicious
The most aggravating reason for the investigation is if HMRC holds evidence and proof of fraud and deliberate tax avoidance. This can come from proven third-party tip-offs.
Other uncontrollable circumstances
Aside from the above mentioned, there could also be reasons that are out of control, such as you are classified by HMRC as a high-risk from their risk-based selection of businesses to check.
Your industry can also be part of their target area of interest because of a high chance of tax evasion, etc., or you are just selected randomly. In short, you just happened to be chosen for an investigation and did nothing wrong.
What to do to reduce your risk of being investigated?
Now that you know the possible reasons, it is much easier to understand and remember what to do to avoid tax investigation from HMRC. Listed below are the tips we have for you:
File on time and ensure accuracy and completeness
Remember that filing your tax return late triggers an investigation, so you should ensure that you submit it on time. It would be better if you could file your tax returns earlier to have more time to check for any omissions, errors, or mistakes you may have made.
Use supplementary notes when appropriate
HMRC can quickly initiate an investigation of your taxes, but in the end, the reason may be a mere misjudgment of the figures. To save time, you can add explanatory texts for amounts and information you think HMRC and their data tools may notice and consider a red flag.
Do not deliberately fabricate or conceal numbers
You may think it is onerous to pay the right amount of tax and consider lowering it by adding costs or hiding your actual income. However, with the advancements of HMRC as they approach digitalization, these fraudulent activities are likely to be noticed.
You should note the consequence of deliberately paying an incorrect amount of tax. Once proven through an investigation, you will have to pay heavy penalties, offsetting the previously saved tax on your return and even exceeding it.
And aside from the penalties, you may also face criminal charges because of tax evasion. That is why it is not a good idea, for the sake of your reputation.
Hire an independent accountant
The best thing to do to avoid errors on your tax returns is to get help from a reputable service provider to handle your tax affairs. Aside from the confidence you have that they file your tax returns on time and correctly, hiring an accountant also gives you more time for your business.
Frequently Asked Questions
What are the chances of being investigated by HMRC?
Even if you know that you paid the correct tax payable and provide accurate information on your tax return to HMRC, you do not automatically escape their radar. As mentioned in the reasons for being investigated, there are still out-of-hand circumstances. So technically, everyone is at risk.
It is impossible to determine the probability of your business being selected for an HMRC investigation, but it is possible to reduce the risk, as we tackled in this blog.
What happens if you ignore the HMRC investigation?
The more you ignore the HMRC notice of investigation, the worst it gets. HMRC has the power to impose penalties against you. To make it worse, they can also involve the closure of your business.
How far back will HMRC investigate?
In general, HMRC has the power to investigate you for up to 20 years from the date of the tax year being investigated. However, the exact time frame can vary depending on the type of tax and the circumstances of each case.
For example, if there is evidence of serious fraud or criminal behaviour, HMRC may be able to investigate further back. On the other hand, if the taxpayer has a good compliance history and the errors in their tax affairs are minor, HMRC may limit the investigation to the more recent tax years.
For careless tax returns, it can be up to 6 years back, and for innocent errors, it can be up to 4 years.
Avoiding HMRC tax investigation altogether is impossible. Still, the risk can be reduced to a minimal probability by filing tax returns accurately and on time, being honest, and considering hiring a reputable service provider. Check out our Sole Trader Accountants.