So, HMRC have contacted you asking to conduct a compliance check of your business.
That means you must’ve done something really wrong, right?
Not so fast.
There are many possible reasons why HMRC might want to take a look at the inner workings of your business, ranging from something minor to the more serious.
It certainly doesn’t help that tax jargon is confusing at the best of times.
Don’t fret, though, as we’ll explain exactly what a compliance check is, as well as why HMRC may have chosen your business specifically.
Let’s get started.
What is an HMRC compliance check?
Simply put, HMRC carries out compliance checks to ensure businesses and individuals are paying the correct amount of tax, at the right time, and claiming the correct reliefs.
They can be completely random, or they might be triggered by something in particular, for example – mismatches in your tax data.
Ultimately, the aim of a compliance check is simply to make sure your records are accurate and up-to-date, and also a true reflection of your business activity.
Why might HMRC ask to carry out a compliance check?
Contrary to what you may have thought, compliance checks don’t only affect those trying to avoid paying tax.
Any business can be investigated at any time, and for any number of reasons.
What are the most probable reasons, though?
Random checks
HMRC will sometimes perform a random check on a business, whether anything has triggered an investigation or not.
With this in mind, it’s important to remain levelheaded, as while it’s obviously scary being contacted by HMRC, it doesn’t necessarily mean there’s cause for concern.
Discrepancies in submitted information
For example, mismatches between your returns and HMRC’s own records, or involving third-party data from banks, employers, etc.
HMRC also look out for potential anomalies, such as low profits despite a high turnover, or a big fluctuation in figures.
Late or inconsistent filings
Frequently submitting your tax returns or accounts after the deadline is another surefire way to get HMRC’s attention, as is making regular mistakes on these.
Industry-specific risk factors
Another way your figures can be inconsistent is if they aren’t consistent with the industry you work in.
Some sectors are more likely to be reviewed, with cash-based businesses generally facing the most scrutiny.
Tips, reports, or external information
HMRC also sometimes receive tip-offs from individuals with inside knowledge.
An example of this could be a tip-off about company directors earning significantly more than employees (and not receiving dividends).
Alternatively, it could simply be noted that you aren’t registered with an accountant, which might raise some eyebrows depending on the size of your business.
What happens during a compliance check?
After initially contacting you, HMRC might request additional documents or ask to arrange a telephone interview.
They may even request access to your home, business, or agent’s office – though this is usually reserved for more extreme cases.
In terms of your records, there are several areas HMRC may want to take a peek at, including your bookkeeping, accounts, payroll/HR data, and your tax returns.
How far back will investigators go?
Generally speaking, HMRC will look over several years of records, but there are limits based on the type of tax and the reason behind the investigation:
- 4 years for genuine mistakes
- 6 years for careless errors
- 12 years for an “offshore matter or offshore transfer”
- 20 years for deliberate tax evasion
This is why it’s recommended that you retain financial records relating to your business for a minimum of five to six years depending on your business structure.
Possible outcomes
In an ideal world, there will be no further action required.
You might even be owed some kind of repayment if you’ve paid more tax than you should’ve.
If you haven’t paid enough tax, however, then you’ll be asked to make up the difference.
HMRC might also issue a penalty, but your own unique circumstances will be taken into consideration (especially if you made a voluntary disclosure, which is where you come forward of your own accord and inform HMRC of a mistake you’ve made).
How to respond to an HMRC compliance check
First and foremost, ensure you communicate clearly and meet any deadlines they set for you.
If your records aren’t already organised, consider investing in good bookkeeping software to help streamline the process.
You may also want to seek professional advice from an accountant, who’ll help you stay compliant and check you’re operating in the most tax-efficient way possible.
What are your rights during a compliance check?
Apart from the obvious, like having a right to be treated fairly, kept informed, etc., you also have a right to representation in the case that HMRC decides to issue a penalty of some kind. The good news is that your accountant can fully represent you (just ensure that’s something you have within your package).
You’ll normally need to make your appeal directly to HMRC, but this can be escalated to a tribunal in some instances.
How to reduce the risk of future compliance checks
Compliance checks aren’t fun, and so it’s worth doing everything in your power to reduce the likelihood of them occurring.
The two main things you can do are to keep accurate and up-to-date records (ideally using MTD-compliant bookkeeping software) and file your returns in plenty of time.
Again, you can also think about seeking professional support where appropriate.
A good accountant will keep you compliant and tax-efficient, and may even be willing to represent you if HMRC do decide to investigate.
Find more help in our online accounting hub, and learn more about how to find the right accountant for your business.
