If HMRC Knocked Tomorrow: Would Your Business Survive an Enquiry?
The thought of being investigated by HMRC leaves most business owners with a sense of fear for what’s about to come. A time-consuming process with the potential of a hefty fine at the end of it is rarely anyone’s idea of a good time, but it doesn’t have to be this way.
Here’s what to expect when HMRC come knocking, and the things that you can do throughout the year to ensure your business stays compliant and thriving.
Common Triggers for a HMRC Audit
Discrepancies in Tax Returns
Errors or inconsistencies in your tax returns can quickly draw HMRC’s attention. This might include significant fluctuations in income or expenses from year to year, incomplete filings, or mistakes in the amounts reported.
Late Submissions
Frequently submitting your returns or tax payments late is a red flag for HMRC. Regular delays can indicate that your business isn’t managing its finances properly.
Random Checks
HMRC sometimes conducts random audits as part of their compliance checks. These help HMRC maintain integrity within the tax system, ensuring that businesses are operating within the law.
Sector-Specific Checks
Certain industries may be more likely to be audited due to the nature of their business. For example, businesses that routinely handle cash, such as restraints and retail stores, are often scrutinised more closely.
Tips from the Public
HMRC may investigate if they receive information suggesting a business isn’t being completely honest about its financial affairs. This could come from a variety of sources, including tips from the public.
How to Prepare for an audit
Keep Detailed Records
Maintain meticulous records of all financial transactions, including invoices, receipts, and bank statements. Well-organised records can clear up any misunderstandings about your tax obligations.
Stay Up to Date on Tax Laws
Keep informed about the latest tax regulations affecting your business. Understanding your tax responsibilities will help you avoid errors and ensure that your filings are accurate.
Seek Professional Advice
Working with a professional accountant, such as Carston ETL, can be invaluable. The advice and assistance of an accountant who understands the intricacies of working with small businesses will only serve to help your business with growth and compliance.
Regular Reviews
Periodically review your tax returns and financial statements with your accountant. Regular reviews can help catch and rectify any errors before they become issues that might trigger an audit.
Be Proactive
If you suspect there might be an issue with your tax filings, be proactive and amend them before HMRC initiates contact. Demonstrating compliance can sometimes prevent a full audit.
Penalties for Poor Record-Keeping
If you fail to keep or preserve adequate records, you can be charged a fine of up to £3,000 per tax year. Usually, if you’re a first-time offender, HMRC will usually just send you a warning letter and take the failure into account when calculating the inaccuracy penalty.
Typically, tax return record keeping penalties will only be charged in the more serious cases, where, for example, records have been deliberately destroyed to obstruct an enquiry or where there has been a history of record keeping failures.
For advice on HMRC penalties, specific reporting guidelines, and advice on how to stay compliant, speak to a member of our expert team at Carston ETL today.
Increased Scrutiny for R&D Claims
HMRC is now investigating 20% of all R&D claim submissions, a significant increase from the previously longstanding rate of around 1%. These enquiries often take several months and are designed to check the eligibility of R&D tax claims.
The initiation of an enquiry doesn’t necessarily imply invalidity of the claim, although, often, these checks can be prompted by factors such as incomplete or incorrect tax submissions, company SIC codes that don’t imply R&D, or claims for amounts of expenditure that are comparatively high when compared to figures shown in filed accounts. They can also be conducted based on a randomised selection basis.
Issues with Director’s Loan Accounts
A director’s loan is money taken out of a company by a director that is not a salary, dividend, expense reimbursement, or money that has previously been paid into or loaned to the business.
A record of money borrowed or paid into the company must be kept, usually known as a director’s loan account, and this money must be repaid to the company or properly accounted for within a set timeframe.
Misusing these loans can lead to financial penalties, legal issues, and scrutiny from HMRC. For information on how to use these loans while staying compliant, speak to a member of our team at Carston ETL today.
How Professional Advice Will Help
By utilising the advice of a professional firm, such as Carston ETL, you can ensure compliance within your company, drastically reducing the chances of a HMRC audit. Plus, if they do decide to investigate your business, you can be safe in the knowledge that your records will be up-to-date and completely correct, simplifying the whole process.
Don’t leave your next audit to chance, book a compliance health check with Carston ETL today.
