What triggers an HMRC audit?

The first thing to point out is that a compliance check doesn’t only affect those trying to dodge paying tax. These checks can sometimes be completely random, or in other cases, be triggered by something, like anomalies in your financial records.

Any business can be investigated at any time, and for any number of reasons.

An audit could be triggered by discrepancies in submitted information (mismatches between your returns and HMRC’s own records, potential anomalies like low profits despite a high turnover, etc.), or by late/inconsistent filings.

There are also industry-specific risk factors, like if your figures aren’t consistent with the industry you work in.

Some sectors are likely to be scrutinised more than others (for example, those that deal in cash). But despite all this – HMRC can perform random checks on a business, regardless of whether anything has been triggered or not.

What happens?

The ultimate aim of a compliance check is to make sure your records are accurate and up to date, and a true reflection of your business activity.

As part of the enforcement strategy of HMRC, criminal investigations are carried out in extreme cases (sometimes resulting in prosecution).

That doesn’t mean everyone will be treated like a criminal, though, as there are legal limits to HMRC’s investigative powers.

As a taxpayer, you also have certain rights you should make yourself aware of – so you know what you do and don’t have to do.

The legal basis of HMRC’s authority

In order to deal with organised crime and things like deliberate tax avoidance, HMRC has to have powers similar to those of other agencies involved in law enforcement.

These powers are not unlimited, though, and HMRC must act within UK law, follow the relevant procedures, and respect taxpayers’ rights (including rights to challenge certain decisions and appeal penalties).

In this sense, criminal investigation powers are not permitted to be used in civil inquiries, like tax return inspections or routine business record checks.

HMRC’s information gathering powers

HMRC can require taxpayers to provide things like financial records, invoices, bank statements, and other information reasonably needed to check their tax position.

Generally, HMRC will want to look over several years of records, but there are limits based on the specific type of tax, as well as the reasons behind the investigation.

So, how far back can they go?

Typically:

• 4 years where reasonable care was taken
• 6 years for careless errors
• 12 years for an “offshore matter or offshore transfer”
• 20 years for deliberate tax evasion

These are the usual time limits, and which one applies depends on the behaviour involved.

HMRC can also request relevant information from banks, financial institutions, and other third parties who may be connected (subject to statutory safeguards).

Inspection and access rights

After their first contact, HMRC may ask for more documents or want a quick phone or video call. In some cases, they might ask to visit your business premises or your accountant’s office. They can’t go into any part of your home that’s used purely as a home, but if you run your business from there, that part could be included.

Is that allowed? Yes. Under Schedule 36 of the Finance Act 2008, HMRC can inspect business premises, assets and records where it’s reasonably needed for a tax check. That includes digital business records too.

Will they give me notice?

HMRC will normally agree a date with you, or give you at least 7 days’ notice. If they expect you to object, they can ask a tribunal to approve the visit in advance. Deliberately blocking an approved inspection can lead to a penalty. If it does come to this, your accountant can deal with HMRC on your behalf.

What are your rights during an audit?

We’ve spoken about the powers HMRC possesses, but what about you? As a taxpayer, you have a number of rights you should familiarise yourself with.

Apart from the obvious, like having a right to be treated fairly and kept informed, you have the right to appoint an accountant or other representative to deal with HMRC on your behalf at any point.

You’ll normally need to make your appeal directly to HMRC, but this can be escalated to a tribunal in some cases.

Penalties and consequences of non-compliance

Ideally, there will be no penalties, as HMRC won’t find anything wrong. You might even be owed repayment if it’s concluded you’ve paid more tax than you should’ve.

If you haven’t paid enough, though, then you’ll be asked to make up the difference.

HMRC might also issue a penalty, but this will depend on your unique circumstances. For example, whether it was a genuine mistake and how compliant you’ve been during the process.

Serious or deliberate non-compliance may lead to closer monitoring of future tax affairs, while serious cases involving deliberate tax fraud may lead to criminal investigations, prosecution, and even imprisonment.

Accurate and up-to-date records, as well as filing your tax returns on time, can help to reduce the risk of future compliance checks.

How should you respond to an audit from HMRC?

First and foremost, ensure you cooperate and meet any deadlines they set for you.

If your records aren’t already organised, consider investing in good bookkeeping software, as this will help streamline the whole process.

You may also wish to seek professional advice from a qualified accountant, who’ll be able to answer any questions and ensure you’re staying compliant.

Your accountant can even represent you if HMRC do decide to investigate or issue a penalty.

 
Find more help in our online accounting hub, and learn more about how to find the right accountant for your business.

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