Investigations into your tax affairs by HMRC can be time-consuming, stressful and impact your ability to earn an income, so it helps to know exactly why you are being investigated, what HMRC’s inspectors are looking for and what lies in store.
Most importantly, if you have stuck to the rules and kept thorough records, everything should go smoothly.
HMRC conducts investigations into PAYE & National Insurance contributions and the VAT tax obligations of contractors. The first investigations we will look at are those into PAYE and NICs, which generally require more careful consideration.
PAYE & NI Investigations
Why have you been selected?
Generally speaking, random investigations into the PAYE & National Insurance contributions of contractors take place every six years, but equally, a contractor could go 10 or even 15 years without being the subject of an investigation. On the other hand, if errors have been found with a contractor’s PAYE and National insurance in the past, investigations could take place every three years.
There are a number of reasons why you might be selected for an inspection. It could be:
- Completely at random
- Due to errors on forms you’ve submitted
- The late submission of P11D or P35 forms
- You operate in a ‘high risk’ sector
How will you be informed?
The first you will hear of an impending tax investigation is likely to be a phone call to your company’s registered trading address from HMRC. You will be asked for a meeting to discuss your tax affairs at your registered address, although HMRC will also usually agree to the meeting being held at your accountant or tax adviser’s office. Holding the meeting at your accountant’s office is recommended as they will know what the HMRC inspector is looking for and help to fight your corner in the event of protracted discussions about your IR35 status.
Once the meeting and the location have been agreed, you will be sent a confirmation letter by the HMRC investigator detailing the type of records they would like to review. This will usually consist of:
- Expenses claims
- Payroll records
- Contracts (if an IR35 and settlements legislation review is to be conducted)
- Cashbook and petty cash book
Even if the meeting cannot be held at your accountant’s office, you should seek their advice before the investigation takes place.
The investigation process
After each visit by the HMRC investigator (there may well be more than one) you will be sent a summary of their findings. After 20 working days, you will then receive a full report explaining exactly what has been examined followed by HMRC’s conclusions and recommendations. If no errors have been found, you will receive a copy of the inspection report explaining that this is the case.
If during the investigation, the inspector found your records to be inadequate, they will explain what you are doing wrong and how to improve your record keeping in the future. If the investigation reveals that errors have been made that indicate you owe more tax than you have paid, you can make a payment on account towards any additional amount HMRC determines you owe. This can help to avoid further interest charges.
If HMRC believes you have underpaid tax, you are entitled to ask for a full explanation of the figures and you will have the opportunity to dispute the findings.
Appealing the decision
If you do not agree with an HMRC assessment of the amount of tax you owe, you will have 30 days to lodge an appeal. You can also ask for your appeal to be heard by the Commissioners at any time during the negotiations, putting forward the figures you think are correct and asking for professional representation if necessary. HMRC can also ask the Commissioners to settle your appeal.
Interest and penalties
HMRC can also seek to add interest to any unpaid tax or apply penalties if it finds you have failed to submit accurate tax returns or claimed excessive tax repayments. When determining a penalty, HMRC will take into account your level of cooperation with the HMRC investigator, whether you provided information voluntarily and the seriousness of the errors or omissions.
Why have you been selected?
Another common area of HMRC investigations for contractors is VAT. Like PAYE & NI, VAT investigations can take place completely at random, but in most cases is a reason a particular contractor is targeted. For example, if you have filed late VAT returns in the past or have large fluctuations in the amount of VAT being paid or reclaimed, this could be a potential red flag to HMRC.
Again, if you have only claimed VAT on eligible business costs and have maintained accurate, comprehensive and up to date records, there should be nothing to worry about. In fact, in some cases, VAT investigations have revealed a contractor has paid too much VAT and is due to a rebate.
How will you be informed ?
A contractor will usually receive a phone call or sometimes a letter warning them that an investigator would like to review their records. HMRC inspectors will usually give contractors plenty of warning of an impending investigation so there should be plenty of time to contact an accountant if professional advice is required.
What records will you need?
The VAT investigator will want to review all your relevant records, which includes:
- VAT certificates
- VAT records and returns
- Sales invoices
- Purchase invoices
- Receipts for expenses and business costs
- Annual accounts
- Supporting documents such as contracts and correspondence
During the investigation
Contractors should have their accountant and anyone else involved in the VAT side of the business available during the course of the inspection to answer any questions the inspector may have. The style of every tax inspector varies, with some more aggressive and challenging than others. For this reason, it is wise to have professional help on hand to step in where necessary and qualify responses if required.
After the investigation
Once the investigation has finished the process will be very much the same as in the HMRC & NI investigations described above. You will always be told exactly what the inspector has found, and whether, in its opinion, VAT is being collected and claimed accurately and compliantly. HMRC will also tell you whether there have been any over- or underpayments and whether interest payments on unpaid VAT or penalties will apply. All this will be confirmed in writing and you will be given the opportunity to appeal the decision.
If your company is struggling to pay its taxes, you should take appropriate steps to address the situation. We have years of experience in helping to turn struggling companies around and negotiating with HMRC to come to an agreement about how the company can pay its tax debts. Do not try and use illegal fixes like fraudulent expenses to try and manage the situation. Call us on 0800 074 6757 for a no-obligation discussion or use the live chat function below.