Some businesses are selected for a tax enquiry because their accounts look unusual, but others are selected more randomly based on a number of risk factors.
Things which may increase the chance of an enquiry:
- Your industry: some industries, such as construction, have a poor reputation for record keeping or cash in hand payments. Businesses operating in this sector are considered higher risk.
- Cash transactions: businesses with a high number of cash transactions, such as nail bars and off licences, are often used for money laundering. This is because cash is considered easier to conceal but HMRC uses experts who will follow a trail doggedly. A business with large amounts of cash may be selected for an enquiry more frequently
- Deadlines: submitting late tax returns suggests that a business may not be keeping proper books and records. Don’t be surprised if you get an inspection from HMRC.
- Anomalies: HMRC hold a database of the sort of margins and costs expected in different industries and sizes of business. If your figures are significantly different from the norm then the taxman will want to know why.
- Previous investigations: If a business had a number of adjustments to make after a previous investigation then HMRC will, understandably, want to check up on them more frequently than a business which had a clean bill of health.
- Associates: If a director or shareholder has a poor track record with HMRC then any associated businesses will be seen as high risk and more likely to be investigated.
The way to minimise your risk (and the inconvenience of an investigation) is to use a competent bookkeeper to keep proper books and records. Be open and honest with your accountant if there is anything that you are not sure about. Submit all your PAYE, VAT and other tax returns in plenty of time for your accountant to do their best job.
You can also take out tax investigation insurance which will cover your accountant’s fees in the event of an enquiry or investigation so that you can relax and know that everything will be taken care of.