One of the most stressful things that can happen to a business owner is an HMRC compliance check. HMRC is coming under increased pressure by the Treasury to ensure that all tax is paid correctly and fairly. Our view is that, in the wake of the economic problems post-pandemic, this pressure will only increase. This will lead to increased compliance checks. In this article, we explain what can trigger an investigation, and what can be done by business owners to reduce the chances of selection.
HMRC Connect is a computer system that George Orwell dreamed up before there were computers. According to HMRC themselves, “Connect is a data matching and risking tool that allows HMRC to cross match one billion HMRC and third-party data items. It identifies “hidden” relationships between people, organisations and data that could not previously be identified. Connect has the capacity to highlight patterns in HMRC’s rich reserves of taxpayer and third-party data, allowing HMRC to find anomalies between such things as bank interest, property income and other lifestyle indicators” and can pull data from all manner if databases, such as:
- Bank accounts and financial institutions (including from 60 other countries and territories)
- Land Registry
- Visa and Mastercard transactions
- Council tax
- Previous tax investigations
- Previous tax returns
- Earnings (from any employer)
- Child benefit payments
- Maintenance payments
- Ebay, Amazon, Gumtree, Etsy, Airbnb
and uses the data it draws to look for anomalies.
While it’s not unusual for business profits to fluctuate from year to year, it is unusual for large swings. Therefore, if your declared profits suddenly fall without a good explanation, HMRC might look at your business a little more closely.
Margins and expenses are inconsistent with industry standards
Similarly, it’s fair to expect that most businesses operating within a specific sector will have similar profit margins and expenses. If your returns show that your business is less profitable due to lower margins or higher expenses than your peer-businesses, this could be a trigger.
You operate in a high-risk sector
Some types of business are notorious for underdeclaring income and operating off-the-books. Historically, takeaways, taxi-drivers, and tradesmen have been known to be targeted by HMRC for this type of activity but any business who receives payment in cash, either predominately or entirely, is potentially on the radar.
Consistently late filing and payment
Submitting a late tax return will lead to a late payment fine. If it’s a one-off, then that may be all you hear from HMRC. However, if you consistently file your tax returns late or make payments after the deadline, that could trigger a compliance check. This covers VAT, PAYE, Self-assessment and Companies House. HMRC take the view that if you don’t attach enough importance to filing on time, you may not attach importance to filing accurately either.
You’ve been reported
As unsavoury as it sounds, HMRC have a mechanism for anonymous tip-offs and the public are encouraged to make use of it. If a third party contacts HMRC and suggests that you’re not paying the taxes you should be, it may launch a compliance check to dig a little deeper. Old business partners and ex-spouses are common sources of a tip-off.
How to avoid an investigation
The truth is there are no guarantees that you will not be the subject of an HMRC Compliance Check, and some experts reckon that every business will have at least one check in their business lifetime. So, while you can’t be sure of never being checked, there are simple steps you can take to reduce the odds.
Be a good little soldier
The best one is to behave. Keeping off the radar by always meeting your compliance requirements is a good start: always file your accounts and returns on time and always pay your VAT and tax bills on time. If you’re consistently finding it difficult to meets your compliance obligations, you should speak to an accountant to see what can be done to improve your performance in this area.
Keep an eye on your margins and expenses
This is good business practice anyway. If your margins are so far out of the norm that HMRC take a look, then there’s a good chance that there’s something wrong in your business. A simple and up-to-date accounting system will allow you to keep an eye on your margins and make adjustments before things go too far wrong.
Of course, there is always the chance that something has happened in the business which has knocked the margins out of kilter. If you are able to explain these, then you should ensure that the while space on the tax return is used to do so.
If the thought of a tax check give you the chills, talk an expert now on how to bomb-proof your business. In addition to reducing the risk of being selected for a compliance check in the first place, we can also help implement measures which would, if you are selected for a check, make things go much easier. Visit the Contact Us page to, erm, contact us.