Have you had concerns about whether an HMRC compliance check can hurt you or your business? Let us be clear from the start, it’s not going to be a nice process, and even if your business is resilient enough to manage the possibility of a fine at the end of it, your mental health will certainly go through the ringer in the process.
The best scenario is to not be a situation where you are audited at all. So let’s look in more detail about what a Compliance Check is, how it might be triggered, what is involved, how to come out of it unscathed and how you can best avoid one in the first place.
What Is An HMRC Compliance Check?
An HMRC Compliance Check is when HM Revenue and Customs (HMRC) checks your tax affairs to make sure you’re paying the right amount. You can be the subject of a compliance check if you’re an individual taxpayer or if you run any type of business.
They will either write or phone to say what they want to check. This could be:
any taxes you pay
accounts and tax calculations
your Self Assessment tax return
your Company Tax Return
PAYE records and returns, if you employ people
HMRC may ask to visit your home, business or an adviser’s office, or ask you to visit them. You can have an accountant or legal adviser with you during a visit. If you use an accountant, HMRC will contact them instead, which is just one of the many reasons to get one!
You may have to pay a penalty if HMRC sends you an inspection or information notice and you do not send information or refuse a visit unless you have a ‘reasonable excuse’, such as you’re seriously ill or someone close to you has died.
After the check, HMRC will write to tell you the results of the check. At this point you will be repaid if you’ve paid too much tax - you may also get interest on the amount you’re owed.
If you have been underpaying tax, then you will have to pay it within 30 days - you’ll normally have to pay interest from the date the tax was due.
You may also have to pay a penalty. When calculating the penalty HMRC will look at:
the reasons why you underpaid or over claimed the tax
whether you told HMRC as soon as you could
how helpful you’ve been during the check
In serious cases where HMRC identify fraud a criminal investigation could be opened. This is why it’s really important to get your tax affairs in order from the start and be very transparent.
Why Have I Received A Compliance Letter From HMRC?
Are HMRC compliance checks random?
These days, due to lack of resources, it is unlikely that you will receive notice of a compliance check as part of a random, routine check though it is still possible. It is more likely that you have been flagged for a check due to a number of reasons.
Why would HMRC do a compliance check?
If there is suspicion of PAYE, VAT or Corporation Tax fraud or negligence then you’ll be flagged for a compliance check. Or in the case that you declare an underpayment yourself, which is not always a terrible idea if you think you have made a genuine mistake - it will save you penalties, then they may investigate.
What triggers an HMRC investigation?
Someone could simply report you for tax fraud; a disgruntled employee, a supplier or customer.
If your annual returns fluctuate wildly from previous years; such as a very large fall in profits or large jump in expenses, then it will certainly trigger suspicion.
Another red light is paying a family member a very large salary when they also work full-time elsewhere too.
And the easiest way to get flagged for a compliance check? Being late or sloppy with your annual tax returns; so just get an accountant and sleep better at night!
How Far Back Can HMRC Investigate?
5 years and 10 months from the end of any tax year is the standard limit. But if suspected fraud has taken place this can be extended to 20 years. That’s a big investigation!
How Long Does A HMRC Compliance Check Take?
Most straight forward compliance checks are settled within three months. A large-scale investigation could take much longer. It’s certainly not a situation that you would want hanging over you for long.
Do HMRC Check Your Bank Account?
Oh hell yes. They can check your business account and your personal accounts too. If you do not comply and give them the information they request promptly, then can issue a ‘Financial Institution Notice’ that will be used to require any financial institution to provide the information to HMRC, without the need for approval from the independent tribunal that considers tax matters.
What Are HMRC Penalties For Inaccuracies?
HMRC may charge you a penalty if you send in a return or other document that contains an inaccuracy, which results in tax being unpaid, understated or over-claimed and was careless, deliberate or deliberate and concealed. Are you keeping up?
You will not get a penalty for an inaccuracy if you took reasonable care to get things right but your return or document was still wrong. Some of the ways you can show that you took reasonable care include keeping accurate records and checking with a tax adviser or directly with HMRC if you’re not sure about anything.
The level of any penalties issued then comes down to what they consider ‘lost revenue’ (theirs as Her Majesty’s collector of taxes, not yours as a business), then they add on a percentage based on their definitions of your behaviour.
Type of behaviour Unprompted disclosure Prompted disclosure
Reasonable care No penalty No penalty
Careless 0% to 30% 15% to 30%
Deliberate 20% to 70% 35% to 70%
Deliberate and concealed 30% to 100% 50% to 100%
So as tempting as it is to take a few jobs ‘cash in hand’ or play a bit fast and loose with your expenses, can you see how it might be very expensive in the long run? How could you demonstrate that your behaviour was at best ‘reasonable’ rather than ‘deliberate and concealed’?
4 Steps For A Stress Free HMRC Compliance Check
Compliance checks can be very stressful and can happen to anyone at any time, no business is too small to be deemed worthy of investigation.
Whilst there’s nothing you can realistically do to avoid a compliance check once they decide you are getting one, there are steps you can take to make the process as stress free as possible if it happens by being prepared.
Be honest! Whilst it may be tempting to not declare that cash in hand job or claim personal expenses as business it is fraud and it just isn’t worth it. Instead of trying to work around the system, use the system to your advantage. Run a tight ship and minimise your tax liability in legitimate ways such as good cost control, smart pricing and taking advantage of available allowances.
Have a separate business bank account. Too many sole traders use their personal bank account to run their business, mixing up their business purchases with their supermarket shopping. This is a red flag to HMRC and because it is difficult to decipher your records and what is and is not a genuine business expense We have an excellent help article here about why you should have a separate bank account for your business.
Use digital bookkeeping software, there are lots on the market, we like Xero and have written a helpful article about taking your books digital.
Keep copies of sales invoices and purchase receipts for at least six years. Either paper copies in a folder or digital copies in a document management software such as Hubdoc (this comes free with Xero) or Receipt Bank.
For most small businesses who have followed the above steps, the compliance check should be very straight forward.
However for larger or more complex businesses it may be worth taking out tax investigation insurance to pay for additional accountants fees if you need extra support from your accountant throughout the investigation.
No one wants to have HMRC breathing down their neck - it’s a highly stressful scenario, even if you feel you have done nothing wrong and have nothing to hide. So taking every precaution to submit accurate and honest accounts and tax returns, VAT payments and PAYE records is your most effective way to keep them at a respectful distance.
Let us know if we can support you with this.
☎️ TEL: 01480 775 611