We've Got You Covered
Of all the dangers you're likely to encounter on your small business adventures, a Tax Investigation from HMRC can be one of the most daunting. What's more, the chances of it happening to you have risen sharply, with the authorities allocating hundreds of millions toward cracking down on tax evasion and fraud.
While larger businesses still tend to be scrutinised more carefully than smaller ones, with around 7% of investigations being conducted at random you can never assume that you'll be passed over. That randomness alone means that most businesses fall under the taxman's crosshairs eventually but, in general, if you do find your business looking down the barrel of an HMRC investigation then the chances are they suspect there's something wrong with your accounts.
Of course, just being the target of an investigation doesn't mean you've got anything to worry about. About half of those inspections end up with no action being taken, and if your books are well maintained there's no reason to think there'll be a problem.
There are a few things that can get HMRC's antennae twitching, and some of these may actually be down to your business doing too well too quickly. If your company's figures leap up rapidly from one year to the next, or conflict with expectations given the sector you're working in, the taxman's often inclined to ask why. To make matter worse, it's generally cheaper for HMRC to chase small businesses over larger, better financed prey (who are often assumed to be less likely to make mistakes in any case).
According to the FSB, the authorities have shown a marked tendency toward targeting businesses with turnovers of £250,000 or less. With their increased powers for searching properties and acquiring information from third parties, it's a foolish business explorer who makes an enemy of HMRC.
If you're already a RIFT customer then you know exactly how important it is to keep your paperwork up-to-date, accurate and filed on time. Those precautions and procedures that RIFT keeps on top of for you are already everything you need to guide you safely through any HMRC investigation. If you're getting your business advice from a less reliable source, however, the outlook could be a lot grimmer.
The business landscape can be a maze of gaping fissures, waiting to swallow the unwary or careless. If you've taken money out of your business but failed to declare it as a loan because it's "your money anyway", for example, then you can expect a long drop and a hard landing. Getting your paperwork in order right from the start is the only way to survive. If your turnover or profits are set to fluctuate, then you need to see that coming and talk to your accountant about explaining the situation to HMRC should the need arise. With SMEs paying an average of £4,376 in tax compliance costs and 70% of them complaining that the system's too costly and complex, you can't afford to be caught off-guard by an unexpected inspector.
So what should you expect when HMRC has you in its sights for an investigation? The short answer is not much warning and not much explanation. You generally won't receive any feedback on why you were selected, for example. The inspector will simply take your records away and come back to you with any questions. They'll probably take a year's worth of paperwork to study, but can demand a lot more if they start to smell a rat. You may be asked for a variety of records, from invoices and till rolls to personal bank and credit card statements going back for several years, and an unprepared business can easily get tripped up over poor bookkeeping.
Specific types of investigation, such as VAT or PAYE inspections, will have particular paperwork requirements you'll be expected to meet, and you should be prepared to dig in for the long haul if you want to challenge any of HMRC's findings, as you'll be looking at months of additional hassle with no certainty of success.
If your books are in order, as they should always be, then all you've really got to contend with is the inconvenience and stress of the whole procedure. Those two factors really shouldn't be underestimated, though - particularly for smaller businesses where your attention and effort need to be tightly focused at all times. That's your best-case scenario right there: a random inspection that turns up no irregularities or concerns. If the results of the investigation turn up a problem, however, things can get interesting in a hurry. You could be looking at penalties of up to 100% of the tax you should have paid, in addition to any penalties and interest you rack up. If you've just made an honest mistake and co-operated fully, there may be some scope for reduction, but in general you'll always be better served by simply taking enough precautions that you never make the mistake in the first place.
If you do find yourself involved in an argument with HMRC your best insurance may, in fact, actually be insurance. Fighting an investigation's findings can take a huge bite out of your finances, but you can take out a simple policy to cover your professional fees and ease the pain. Appealing against HMRC takes time and can be a personal and professional nightmare, but RIFT's partners can make sure that you have the right insurance against all the pitfalls you might otherwise tumble into.
A Commercial Legal Expenses policy will typically cover:
Tax investigations are a traumatic fact of life out on the Business Battlefield, but good planning, a guiding hand and the strongest safety gear will have you ready to tackle anything. Talk to RIFT to make sure you're prepared, or send up a flare if you're already caught in rocky terrain. We'll send out a rescue party.