The investigation by HMRC is very rarely welcomed pleasantly by the self-employed small business owners or the sole traders. As we all know, this process is quite time-consuming and full of stress as well. This can make you pay higher tax bills no matter what type of business you are running. Like the majority of people, you will also hope not to undergo the investigation of HMRC. If you are a self-employed business owner, you need to know when HMRC investigates the self-employed?
However, if you are the one who is chosen by HMRC for the investigation, the first wise thing is to get yourself prepared at your best. Whether you are about to undergo the investigation or you are seeking a guide that can help you to be prepared for HMRC’s investigation, you are just on the right page. As this guide will help you to explore the reasons why HMRC investigates self-employed business owners, what can be various types of investigations, and what happens in the investigation.
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The Reasons HMRC Investigate the Self-Employed
There can be multiple reasons that possibly attract HMRC for an investigation. The most popular ones are listed and explained here for you:
1- You are not using a business account: You are aware of the requirement of using an account to complete your self-assessment tax returns. It has been observed that the businesses that are not using an account tend to receive more investigations by HMRC than the ones who do. This makes HMRC thinks that you are more inclined towards making mistakes when you will file self-assessment tax returns.
2- The Fluctuation of the profits: There is no possibility of making the same profit amount each year due to many factors involved that may cause the fluctuation in the profit figure. The dramatic fluctuations may not seem real to HMRC if this is the case with your business profits. This will make HMRC suspicious and you will more likely receive the notification of investigation.
3- A Tip-Off is received: If an outsider reaches out to HMRC and shows concern about your business and is unable to trade fully on board, this will make HMRC decide to investigate you. This is because someone might be suspicious about the declaration of your earnings and income. The investigation will ensure that the declaration of your income is being done fairly.
4- Mistakes in the self-assessment tax return: Any kind of mistake in filing the self-assessment tax returns can call for the investigation of HMRC immediately if it is found out by HMRC. This is why you should ensure to pay the right amount of money when it comes to tax on your earnings.
5- You are not making a profit for years: It is not possible to make a profit every year for all the businesses. In case you are the one who is unable to make business profits for several years. HMRC will be suspicious about your reporting. They might think that you are under-reporting your profits or you are over-reporting your business expenses.
What Are The Types of HMRC’s Investigation?
This might sound surprising to you but there are different types of investigations by HMRC. You know that you will not undergo a full investigation even if you are the one who is chosen for it. The two possible types of investigations are there that you will have to deal with. These two types are known as aspect enquiry and full enquiry. The details are discussed below.
1- Aspect Enquiry: There is the possibility of aspect enquiry if you have made mistakes while filing self-assessment tax returns. By aspect enquiry, we mean to get investigation only for one aspect of the business. That is finance in this case. The possibility of such investigations can only be expected if you have made a genuine mistake in the self-assessment.
2- Full Enquiry: If there is a serious problem with your tax returns, be ready for the full enquiry by HMRC. This is only when your reporting is suspicious as underreporting and that you are trying to reduce your tax bills by doing so. You will have to provide your business record to HMRC during the full enquiry. In case you are not declaring your income fairly, they will personal financial records as well.
What Happens In HMRC’s Investigation?
By now you must be wondering about what exactly HMRC will check during the investigation. This generally depends on what type of investigation is launched for your business. In case of aspect enquiry, the finance department will be investigated and in case of full enquiry, your financial records will be examined fully. Moreover, the required information by HMRC may include the following:
- The expenses details of your business along with the receipts
- self-assessment tax returns.
- All the paid taxes details
- Bank statements
- Invoices of sale
- PAYE records
Furthermore, HMRC tends to inform the accountants to provide the mentioned information when they inform you of the investigation.
The Bottom Line
In conclusion, we can say that it might feel daunting to file your self-assessment tax returns but making sure that you have made no mistakes will help you to avoid any kind of investigation by HMRC. A qualified accountant can be really useful to proofread your details before you plan to submit them. This will ensure that your tax returns are error-free and your accounts are in the right order.
For this, we suggest you seek professional help if you wish to learn more about HMRC’s investigation. Why wander somewhere else when you have our young and clever team of professionals at Accotax.
Disclaimer: The information provided in this blog about when HMRC investigates the self-employed, including the text and graphics, in general. It does not intend to disregard any of the professional advice.