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How to Prepare your Business for Tax Investigation

Nov 4, 2021 | UK Accounting

Not knowing a thing during tax investigation can be a huge problem when HMRC engages on it. Here’s how you can prepare your business and yourself for a Tax investigation.

Taxes in the UK: How to Prepare your Business for Tax Investigation

In the UK, tax evasion is rife, and Her Majesty Revenue and Customs (HMRC) has taken a few measures to ensure that businesses pay the right amount of corporation tax. As a result, they engage in tax investigations and could use a range of tools to verify that companies are paying the right amount of tax. 

Ensuring that your tax affairs are in order won’t put investigations far away from your company. It is important to take the necessary steps to ensure that all your tax affairs are in order and that you are paying the right amount of tax, even if all may appear to work just right. 

You may not be off the radar just by paying your taxes as expected. A tax investigation is sometimes launched through random selection, and the process can be time-consuming and expensive for businesses, especially when you appeal against the decision from HMRC.

In this article, we talk about a few things you should watch out for as well as the importance of keeping accurate tax records in order to help you prepare for any investigations that may be expected or unexpected. 

Why do tax investigations occur? 

HMRC is always looking to narrow the tax gap and ensure that all companies pay their fair share. The tax gap is the difference between what the HMRC hopes to collect and what it actually gets.

This is designed to ensure that HMRC gets all that it’s owed from businesses and corporations. The number of investigations from HMRC is on the rise as the HMRC seeks to maximise its tax receipts.

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Small businesses are equally in HMRC’s sights

As HMRC looks to crackdown on tax avoidance, they may be looking into your affairs because you have made regular errors on your returns or there has been a significant drop in your corporate tax bill over the years.

This is usually a red flag and suggests the company may be avoiding taxes in the UK. There may equally be inconsistencies with industry earning standards or a director’s pay may be questionable due to reasons that are unknown to HMRC.

In essence, any factor could cause an investigation into your company. While all these are legitimate reasons HMRC may investigate your company, an investigation could result from random selection. 

Keeping all your bills and payments in order is important as the HMRC could be looking back by up to 20 years. They use sophisticated software to verify payments and other details over a long period.

This is an effective tool to enable them to identify inconsistencies in your tax returns. It equally enables them to easily launch an investigation. 

What goes on in an HMRC investigation

After HMRC has decided to investigate you, you will receive a letter that asks various questions. You are obliged to supply HMRC with such information or may automatically risk large fines or prosecution.

However, you may equally query the decision by HMRC if they are investigating your taxes and you believe this to be incorrect. 

Some investigations involve errors that have been resolved or closed. However, others are quite detailed involving bank or credit cards, which can usually result in a very lengthy process.

The majority of investigations equally result in the investigated party paying back some taxes to HMRC. They usually have up to thirty days in order to do this or risk fines and prosecution.

However, if HMRC finds that the error in question was deliberate, they are likely to prosecute your business. 

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How to take preventive measures

In order to prevent you from being investigated by HMRC, there are a few steps you may take. Firstly, make sure you keep organised and accurate records of all your tax dealings, revenues, and expenses.

Secondly, make sure you have a strong understanding of all your research obligations; Finally, seek the assistance of counsel of a tax or accounting professional in order to better report to HMRC.  

1). On a daily basis, good bookkeeping practice will enable you to run your business in an organised fashion. Good book-keeping practices will ensure you appear in an appositive light to investigators.

All you record equally provides you with the intelligence to ward off any investigations. 

2). If you are audited by HMRC, make sure you have all the adequate records, which can be usually obtained from good accounting software.

They will provide the evidence you need to show concerning your payments to HMRC, and any good accounting software should be able to provide you with such records.

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Obtaining professional assistance from an advisor

Whenever HMRC investigates you, do not hesitate to ask a professional for help. Finding the right advisor to enable you to navigate the demands of HMRC is advisable and will equally save you time and hassle.

You should seek help to enable you to decipher why HMRC may be asking for specific information and strategies you could employ to prevent you from paying huge fines. 

Frequently Asked Questions

  • How to cover the costs with investigation services?

    A good option is to purchase the services of an investigator, who may charge a monthly or annual fee. By planning effectively, you will avoid paying hefty fines to HMRC, and they will be able to help you account for any shortcomings.

  • What if I have great records?

    You may have all the records as required by HMRC, but rules change, and you are required to adjust to any incoming rules around taxation and reporting. These new rules can impact even the best of businesses, so keep track of changes in the law.

  • What are the costs of an investigation?

    Depending on the nature of the investigation, tax investigations can be costly and lengthy. Bear in mind that the longer it goes, the more likely you will pay more taxes. However, some businesses simply rely on their accountant.


When in doubt, always find the right tax and financial help. This will save you both time and money.

If you are under investigation by the HMRC or receive a letter of intent, the advisor you hire will help you navigate this difficult process and ensure you comply with the tax authorities as needed.

This could determine if you pay a fine to HMRC or not. 

For further professional help during tax investigations, check out Sterlinx Global.

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