How to prepare for HMRC tax investigations

Published by George Guilherme-Fryer on 19 January 2024

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HM Revenue & Customs (HMRC) are using a piece of highly efficient software which is accessing and trawling through your financial information right now. The ‘CONNECT’ system is scouring hundreds of different information sources to unearth discrepancies between taxpayers and businesses, income, assets, and transactions. However, sometimes the information held may not be correct and HMRC often select the wrong targets for that ubiquitous brown envelope.

Likewise, HMRC utilises tip-offs from the public to identify new investigation cases. Last year HMRC received over 160,000 whistle blower reports which represents a rise of 47%. Unfortunately, while some of these reports are identifying genuine tax cheats, many innocent businesses may also be wrongly accused and subsequently embroiled in an expensive and stressful tax investigation. Reports of tax fraud can come from a diverse range of sources including disgruntled current and former employees, ex-spouses, dissatisfied customers and even business competitors.

Keep detailed records

All HMRC investigations will begin with some kind of information request to help the inspector understand your specific tax position. To protect your position, it is imperative to keep evidence that supports your tax return.

There are no rules regarding how records are kept, however they must be accurate and complete otherwise you could receive a penalty before HMRC have even ascertained if you have paid the correct tax.

How long should I keep my records for?

You should keep all records and documents that you have used to complete your tax return for:

  • 22 months after the end of the tax year if you are an individual without a business.
  • Five years from the 31 January after the tax year if you are self-employed or in a partnership.
  • Six years from the end of your accounting period if you are running a company.

Appoint a reputable advisor

Whether you have made a mistake or believe your return to be accurate, a good advisor will translate the many complicated questions HMRC may pose, manage the entire conversation with them, help you submit any required information and minimise the impact on your business or personal life.

With appropriate specialist advice and a full and accurate disclosure, any financial penalty will be reduced and the stress of the situation can be minimised.

Don’t wait for HMRC to find you

If you believe you have made a mistake on a prior tax return then it is important to consider making a voluntary disclosure. If you approach HMRC before they have a chance to find you, then you will be treated more favourably and will reduce any penalty due. HMRC’s contractual disclosure facility can even prevent a criminal prosecution for tax fraud. Get in touch to speak to Kreston Reeves’ Tax Disputes Experts for more information.

Subscribe to our Tax Investigation Service

Tax investigations into innocent taxpayers are unfortunately not rare. Cases where the taxpayer was proved to be innocent have accounted for between 31% and 47% of all tax investigations over the past two years. An HMRC tax investigation is often a tense experience for the taxpayer accused, who must typically invest significant time and money in compiling their defence, often clocking up thousands of pounds of professional fees.

We offer a Tax Investigation Service, which covers our professional fees up to £100,000 providing representation and advice including all correspondence and HMRC interactions.

To find out more about how you can prepare for an HMRC tax investigation, contact us today and speak to a member of our team. We can also provide additional information about our Tax Investigation Service, and provide tailored recommendations for your individual circumstances.

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