How to Prepare for an HMRC Inspection

Receiving a tax investigation is always stressful for the directors of a company. This fear usually comes from not understanding how this process works and not knowing what to do if you receive an investigation notification. In this article, I explain how to prepare for an HMRC inspection.

What is HMRC? Why do They Conduct Tax Inspections?

His Majesty’s Revenue and Customs (HMRC), is a department of the UK government that is responsible for the collecting and administrating all the direct taxes in this country. These include VAT, Corporation Tax, Capital Gains Tax or Income Tax, among others.

The HMRC will conduct fiscal inspections to ensure that companies comply with the current tax regulations or if they suspect that a corporation has committed certain irregularities in the payment of levies.

Types of HMRC Inspections

There are three different types of inspections that HMRC can carry out.

Full enquiry. HMRC will review all company records because there may be errors in tax returns. They will be able to inquire into the fiscal matters of both the business itself and those of its directors.
Aspect enquiry. During this type of investigation, they will analyse specific aspects of an enterprise’s finances.
Random checks. Even if a company complies with all tax regulations, it can receive random inspections at any time.

How Should a Company Prepare for an HMRC Inspection

How to Prepare for a Notice of an HMRC Inspection

An investigation shall be formally initiated by letter addressed to the directors or the accountant of the company, if they are recorded as its agent. It will explain the type of inspection, the time period that they will review and the documentation they will require.

At this time, the corporation must review whether the HMRC is within the legal timeframe to open the investigation. Typically, they have one year since the business sent the tax return, but they can extend it if they have evidence that the company has hidden certain data.

Sending Documentation

Once they have notified the business, it must send the HMRC certain documents. These include tax returns, sales and purchase invoices or bank and credit card statements. It is also possible that HMRC may need to visit the directors in person.

In they refuse to send these files or to receive the visit, it may result in fines.

Review of Documentation

HMRC will review the files they have requested and, if necessary, they may ask for further information to the directors.

If they encounter any problem, they will assess possible resolutions for the company, according to their specific case. In case of suspected fraud, they may consider it appropriate to conduct interrogations to those involved.

Closure of the Case

After completing the investigation, HMRC will propose a possible resolution. Business directors will have 30 days to accept the decision or to appeal it.

If they demonstrate that the company has paid less taxes than it should have, they will detail what it owes, interest and possible economic penalties.
In the case the enterprise has paid more money than it was supposed to, it will receive a refund with interest.
If there was deliberate tax evasion, they can apply serious economic sanctions and even prison sentences.

How to Minimise the Chances of Receiving an HMRC Inspection

As I previously explained, there is a possibility of receiving random inspections, so the risk of being investigated will never be zero. However, if you take certain measures, you can minimise the options for HMRC to inspect your business.

Hiring an accountant. These finance experts will make sure to keep both the accounts and the payment of taxes in order. They will ensure that the company pays its corresponding levies on time and reduce the risk of including misfigures or filing the returns late.
Keeping the accounting records updated and ordered. Careless accounting can lead to unnecessary mistakes.
Meet the deadlines and pay your taxes correctly. Not complying with these two factors is one of the most common indicators that typically lead HMRC to conduct an inspection.

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