HMRC Inquiries for Small Businesses: A Complete Guide

Our guide to HMRC investigations walks you through the entire process, including how long they take, what you need to do, and how to protect your company.

As a business owner, you may find that your finances and taxes are being scrutinized. An HMRC investigation can feel like a time-consuming procedure that hinders you from focusing on your business, so understanding what to expect will help calm your nerves.

What causes a tax investigation?

It's possible to be chosen at random for a tax investigation, and having strong financial and accounting records will help make any investigation go more smoothly, but it all depends on the attitude of the inspector you're working with.

HMRC risk assesses their compliance activity by combining information from several sources into their Connect computer system. This includes information received from banks and building societies, land registry checks, DVLA, publicly available social media information (so don't tell the world you have 10,000 customers when your return income suggests you only have 100
), and even information received about you from members of the public with a vendetta.

It's important to understand that HMRC is not required to provide a justification for initiating their investigation. While the form of the questions asked in the introductory letter may aid in identifying their concerns, the FSB Tax Investigation Protection experts who represent FSB members in an investigation will always strive to have that discussion with the inspector as early as possible in the investigation. Understanding the inspector's emphasis is really beneficial in achieving the best possible outcome for you.

  • Some of the following, however, can act as triggers:
  • Tax returns with errors, omissions, or contradictions.
  • Your business's outcomes may differ from what HMRC expects from that trade or sector.
  • Year-to-year variations are significant. An increase in spending from one year to the next, for example.
  • Low proprietorial drawings or money invested in the business.
  • Types of trades or businesses; for example, cash trades and trades where HMRC can check income against third-party data.
  • Returns on VAT lead to demands for reimbursement.

How does a tax investigation work?

The procedure will begin with a letter from HMRC informing you that an investigation is being conducted. There is no requirement to provide a rationale for the investigation. In the case of late returns, a legitimate enquiry notice must be given within 12 months of the date the Tax Return was submitted to HMRC. It's usually a good idea to double-check the notice's legitimacy.
A proposed response deadline will be included in the letter, which is normally between 30-35 days. It is required that you respond in writing. HMRC conducts two sorts of investigations. Aspect inquiries are inquiries into only a portion of your tax return's entries. They're usually more focused and technical, questioning why specific goods have been claimed. A complete enquiry is potentially an indication of displeasure with the entire return, implying that HMRC has legitimate concerns about the business and will ask to see all of your business records for the year in question.

What information will HMRC require from me?

HMRC will normally ask for all of your company's records for the year under investigation, however this may vary depending on the nature of the investigation.
  • The company's bank statements
  • Paying in slips and chequebook
  • Statements from credit cards
  • Bills of sale/till rolls
  • Estimates or job quotes
  • Invoices for purchases and receipts for expenses
  • Records of VAT
  • Accounts Payable
  • Getting in touch with HMRC
The inspector has the authority to issue a Schedule 36 FA 2008 information notice if you do not answer in a timely manner. This directs HMRC to produce records and information. A monetary penalty will be imposed if you do not comply. When there is a delay, the inspector has the option of issuing a notice. You have the right to appeal if you believe the request is unreasonable.
Although it would not be unreasonable to expect HMRC to respond within the same timeframes as you, the taxpayer, this is not always the case. If the case is taking too long, or you believe HMRC's demand for information and documents are unfair, you can contest it in a number of ways, including filing a closure notice application with the Tribunal if necessary.

During a meeting with HMRC (Her Majesty's Revenue and Customs)

There is no legal requirement for a taxpayer to meet with HMRC, and in more technical types of enquiry, such as VAT, Employer Compliance (PAYE/P11D/NIC), and IR35 compliance visits/disputes, you are unlikely to be required to be present (although HMRC prefers to meet with you face to face to question you!)
A meeting is more likely in a full investigation, where HMRC is likely to want to understand the entire workings of the firm and check if the business's revenues can sustain both company and personal outgoings. It may therefore be in your best interests to meet in person, but you should follow your adviser's advice.
If you do meet with an inspector, it will most likely be at the inspector's office, but it can also be at your business or a neutral location if that is preferred.
Typically, the inspector will ask questions about certain parts of the firm. These may include, but are not limited to, the following:
  • Your company's background history
  • Work that has been done, changes in recent years, or who performs what in the company
  • VAT and, if relevant, PAYE concerns
  • Keeping and maintaining records
  • Banking policy and cash handling
  • Invoice deadlines
  • Expenses are paid in cash or via check.
  • Receipts from businesses, as well as cash and checks
  • Personal and non-business expenses
  • Loans from family and friends
  • Betting is the winner.
  • Endowments that are ageing
  • Legacies
When there are concerns about a director's personal finances or circumstances, HMRC has the power to investigate. Directors, on the other hand, are a separate legal creature from the company, and the firm cannot be forced to provide personal financial records of directors without good reason.
Accounting Firms is a firm that specialises in insolvency and can provide further information on the stay of execution. We have more than three sites across the country and offer free same-day consultations.

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