Undergoing an HMRC audit — or investigation — is something no business owner wants to experience. Not only are they incredibly stressful and worrying, they’re incredibly time-consuming as the business owner must manage their side of the investigation whilst also paying out on average £5,000 in accountancy fees.
There’s also more bad news. No business can totally eliminate the threat of an investigation, even if they’ve been adhering to all the rules. This is because sometimes HMRC conduct audits at random, with no reason other than your business’ name being the unfortunate one to be picked.
Whilst little is known about what really triggers HMRC investigations, we’ve compiled a list of 6 of the well known flags to avoid so that you can ensure if it ever does happen, despite a stressful process, your business won’t truly have anything to worry about.
1. HMRC receives a tip-off.
If an anonymous tip off was the reason behind HMRC’s sudden arrival at your door, they will never give this as their reason for arrival so you’d truly never know. However if there’s no other conceivable reason you could think of, it could be down to:
- A disgruntled ex-employee or ex-partner who is under the impression that there are tax-evasive activities going on.
- Your business is solely cash-only, and this policy has aroused suspicion
- Your lifestyle appears to be beyond your means
Out of the 3, justifying your lifestyle would be the most difficult to address, especially if the money you have been spending comes from sources of income that are not related to your business, such as a trust fund or inheritance.
If there are tax-evasive activities going on in your business and you are aware of them, it is best to not undertake any such schemes as the truth is always bound to come out. Meanwhile, a cash-only policy may seem harmless but in the age of card transactions, and in the rise of contactless payments in the wake of the Covid-19 pandemic, a cash-in-hand only business model can raise eyebrows of both patrons and HMRC.
2. There are mistakes on your returns.
A one-off mistake is easily forgivable, and a majority of the time HMRC will rectify this with you or your accountant in a series of quick checks, but if there are constant mistakes they will become suspicious. Mistakes could include submitting inaccurate figures or year-on-year information, as well as any attempts HMRC suspects are designed with fiddling the books in mind.
If you are doing your accounting independently, and you are called up more than two times in a row, it’s time to talk to an accountant and get your paperwork in line – pronto.
3. Your numbers are fluctuating.
HMRC understands that businesses rarely pull in identical figures year-on-year. Sometimes there are financial booms, upturns and natural downturns, but if the difference between one year is substantially larger or smaller than the year before, it could lead to questions.
If your business has unfortunately experienced a huge drop in turnover, or excitedly received a huge upturn in profit, it’s best to avoid an investigation and forewarn this to HMRC. When filing your returns, there is a section on the document to include any additional relevant information. Here you can outlay exactly what has happened, whether you took time off, your business unfortunately is in a slump, or alternatively even if it’s as simple as experiencing a huge boom in your industry. However, be honest. If you jot down that your growth is due to a boom in your niche, HMRC will verify that by researching other businesses in your chosen sector, and if they do not see information that collates with your reasoning, they’ll still raise their eyebrows.
4. Your figures are inconsistent with industry standards.
Following on from our last point, HMRC has an incredible collection of data that works out on average what every single industry is earning year-on-year.
If your figures are substantially different from the average high earning business in your industry, HMRC will become instantly suspicious. If genuine circumstance has benefited you, don’t worry and continue being honest in your returns. Instead, just ensure that you have established yourself as the correct type of business. A limited company having a surge will look less suspicious than a sole trader, and vice versa.
5. You’ve never made a profit.
Whilst HMRC mostly expects your accountant to be a tax expert, if you are filing tax returns that show you have not turned a profit, but have remained in business for more than three or so years, investigators are going to become suspicious of how you are still managing to operate.
If it’s just a case of you having an unlucky run and a lot of investment behind you to float your business, you must make this clear with HMRC on the tax return and inform them of the reasons why you are failing, or struggling to tip that scale.
6. You do not have financial representation.
Accountants are vital to any business, not only for their work, advice and support that they can give to business owners, but they can also drastically reduce your chances of being investigated, simply by being involved in your financial paperwork.
A business owner managing their own finances could have many reasons for keeping those shielded from the eyes of HMRC, but by using an accredited accountant, this eases HMRC’s suspicions and helps boost trustworthiness.
If you are a small business owner independently managing your accounts, HMRC may launch an investigation anyway just to ease their own anxieties around business owners potentially making mistakes with paperwork simply due to inexperience. However, if you own a large corporation and you are still declaring yourself the sole proprietor of your financial paperwork, HMRC may also launch an investigation to understand why, so the best solution would be to get an accredited accountant on board, fast.
We hope these guidelines give you some insight into the world of HMRC audits. If you are a business owner juggling accountancy and the day-to-day runnings of your business, iFinance Department is here to help you. We’re a trusted accredited accounting firm who can take care of all elements of accounting, bookkeeping and even offer CFO services, plus offer any advice or guidance you may need. Book a quick call with us now and let us take the stress of accounting off of your shoulders.