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With the frequency of compliance checks rising after the pandemic, businesses are under increased scrutiny by HMRC. Compliance checks have been pivotal in identifying discrepancies in companies’ financial records and potential revenue losses to the exchequer due to fraudulent activities and errors in government COVID schemes. As a result, businesses are now mandated to fulfil their legal obligations and pay the correct amount of taxes more meticulously than ever.
A compliance check serves to confirm that businesses are adhering to tax laws and regulations. It involves HMRC scrutinising a company’s financial records, identifying errors, and confirming the accurate reporting and payment of taxes. It ensures that businesses are aware of their legal obligations and operate in a way that aligns with them.
Reasons for Compliance Checks
The selection of a company for a compliance check can occur for various reasons. In some instances, HMRC randomly selects a company as part of its continuous efforts to ensure businesses are compliant. In others, potential issues or discrepancies in the company’s tax returns or financial records may have flagged a compliance check. Comparisons from the company’s past financial performance and statements also contribute to this decision.
Furthermore, companies operating in high-risk industries or sectors such as construction or hospitality or those dealing with high volumes of cash transactions can be subject to compliance checks due to the elevated risk of errors or non-compliance.
Understanding the Compliance Check Process
The compliance check process begins with a notification from HMRC stating the intent to conduct a check. This notification includes essential details like the date and time of the check, the HMRC officer’s name, and a list of documents required for review.
During the check, the HMRC officer will inspect the company’s financial records, including invoices, receipts, and bank statements. They may also interview employees and review tax returns, looking for inconsistencies or discrepancies indicating non-compliance with tax laws and regulations.
Understanding the process is vital for businesses to ensure they are always prepared for a compliance check. Their tax affairs should be current and accurate and possess the necessary documentation to back their tax returns. Additionally, businesses should be aware of their rights and obligations during a compliance check, including their right to appeal any decisions made by HMRC and reasons for being selected for a compliance check.
Types of Compliance Check
Compliance checks are important tools HM Revenue and Customs (HMRC) use to ensure businesses are correctly meeting their tax obligations. These checks help maintain fairness in the system and help to preserve public confidence in the tax system. HMRC conducts various compliance checks, each focusing on a company’s financial records and tax affairs.
1. Desk-Based Checks
The simplest and most common type of compliance check is the desk-based check. This process involves HMRC officials reviewing a company’s tax returns and financial records remotely. This check generally includes a review of accounts, tax computations, and supporting documents that businesses are legally required to keep. Desk-based checks are usually less disruptive and resource-intensive for businesses because they do not require a physical visit by HMRC officers.
2. On-Site Visits
On-site visits involve HMRC officers visiting a company’s premises to inspect their financial records, interview staff, and evaluate other relevant documents. These checks are usually more thorough and may be chosen when HMRC believes significant risk or complex issues might be involved. For instance, an on-site visit may be warranted if there is a history of persistent non-compliance or indications of fraudulent activity. In addition, it provides the officers with an opportunity to review records and processes in real-time and more detail.
3. Aspect Inquiries
Aspect inquiries are targeted checks focusing on specific aspects of a company’s tax affairs. This could be a particular tax year, specific transactions, or certain expenses. For example, HMRC may want to examine the validity of the capital allowances claimed or whether the correct VAT has been paid on specific transactions. Aspect inquiries allow HMRC to investigate potential issues without undertaking a full examination of a company’s tax affairs.
4. Full Inquiries
Full inquiries are the most comprehensive type of compliance check conducted by HMRC. HMRC reviews all aspects of a company’s tax affairs in a full inquiry. This could involve examining complete sets of financial records, evaluating the company’s overall tax strategy, and scrutinising any areas where the company has used discretion in interpreting tax laws. Full inquiries are usually reserved for situations where HMRC suspects serious non-compliance or fraud.
5. Cross Tax Checks
Cross-tax checks are designed to verify compliance across different types of taxes. For instance, an investigation might look at both corporation tax and VAT or income tax and national insurance contributions. These checks are used when HMRC needs to understand the whole picture of a company’s tax affairs.
Each type of compliance check has its focus and approach, and the check a company might face can depend on various factors, including the company’s size, industry, tax history, and perceived risk level. However, regardless of the type of check, businesses need to maintain accurate and complete financial records and be prepared to cooperate with HMRC during any compliance check process fully.
Steps to Prepare for a Compliance Check
Navigating a compliance check conducted by HM Revenue and Customs (HMRC) can be challenging, but with proper preparation, businesses can significantly mitigate potential issues. Here are detailed steps that companies should consider to prepare for a compliance check effectively:
1. Conduct an Internal Review:
Performing an internal review is a proactive approach to ensure that the company’s tax affairs are in order. Companies should examine their tax and national insurance contributions, financial records, payroll records, and tax returns. These reviews should identify and rectify any discrepancies, errors, or inconsistencies. The internal review can also provide insights into any business areas that may be particularly susceptible to mistakes or non-compliance.
2. Appoint a Compliance Officer:
A Compliance Officer plays a critical role in a company. This person is responsible for ensuring the business complies with all HMRC regulations. A compliance officer should have a comprehensive understanding of tax and national insurance regulations and should be able to handle any inquiries that HMRC may have during a compliance check. They should also regularly update their knowledge to accommodate tax law and policy changes.
3. Organise Financial Records:
A key step in preparing for a compliance check is to ensure that all financial records are organised and easily accessible. This involves maintaining clear, detailed records of all transactions, including invoices, receipts, and bank statements. It’s important that these records are kept up to date and stored in a manner that allows for easy retrieval. HMRC may request to see these documents during a compliance check, and having them readily available can save time and reduce stress.
4. Train Employees:
Employees who understand tax and national insurance regulations are assets during a compliance check. All staff should be aware of the basics, while individuals in relevant roles such as finance or payroll should have a deeper understanding. Training programs can help employees understand their responsibilities, enabling them to answer any questions that HMRC may have during a compliance check.
5. Consult with Professionals:
Seeking professional advice from a tax agent or accountant is a critical step in preparing for a compliance check. These professionals can guide on complying with HMRC regulations and assist during the compliance check process. They can also represent the company in discussions with HMRC, answer complex questions, and provide evidence of compliance.
6. Develop a Compliance Plan:
A formal compliance plan can help businesses meet all necessary tax obligations. This plan should outline the company’s strategies for complying with tax laws, including record-keeping procedures, payment schedules, and protocols for handling HMRC inquiries. Regularly reviewing and updating this plan can help identify potential non-compliance areas before they become problematic.
Preparing for a compliance check is about understanding your obligations, training your staff, and proactively managing your company’s tax affairs. With these steps, a company can be well prepared for any compliance check and minimise the risk of penalties or fines.
The Role of a Tax Agent or Accountant
Tax agents and accountants are essential in business compliance checks and financial management. They have the expertise to ensure that a company fulfils its tax obligations correctly and efficiently. Here is an in-depth look at the various ways a tax agent or accountant can assist during the compliance check process:
1. Tax Compliance Advisory:
One of the primary roles of tax agents or accountants is to provide advice on tax compliance. They help companies understand the complexities of tax laws and regulations, ensuring they meet all their legal obligations. They can also inform businesses of tax law changes that might impact their operations. Additionally, they assist in identifying potential tax risks and provide strategic advice to mitigate them.
2. Assistance During Compliance Check:
During a compliance check, a tax agent or accountant can assist by responding to any questions or requests from HMRC. They can also provide evidence of compliance, including explaining how the company’s tax calculations were made and why certain tax positions were taken. Their expertise can be instrumental in making the compliance check process smoother and less stressful.
3. Representation:
Tax agents or accountants can represent the company during a compliance check, acting as a liaison between the company and HMRC. This includes responding to correspondence from HMRC, attending meetings on behalf of the company, and negotiating any disputes that might arise during the compliance check process. Representation by a knowledgeable tax professional can be invaluable, especially in complex situations.
4. Preparation and Submission of Tax Returns:
Tax agents or accountants help prepare and submit accurate tax returns on time, ensuring the company fulfils its tax obligations. This includes calculating the tax due and taking advantage of any available allowances, deductions, reliefs, or rebates. Properly prepared tax returns can reduce the likelihood of triggering a compliance check.
5. Record Keeping and Reporting:
Good record-keeping is essential for tax compliance. Tax agents or accountants can advise on the best practices for maintaining financial records, ensuring that all relevant information is accurately recorded and readily available if needed. They can also help prepare statutory accounts and other required financial reports.
6. Tax Planning and Strategy:
Beyond compliance, tax agents or accountants can provide strategic tax planning advice. This could involve strategies to minimise tax liability within the bounds of the law, advice on the tax implications of business decisions, or planning for future changes in tax laws.
The role of a tax agent or accountant is crucial during a compliance check. They provide expert advice, assist during the check, represent the company, and help with record-keeping, tax return preparation, and strategic tax planning. Their involvement can significantly improve the company’s chances of a successful outcome in a compliance check, ensuring that the business complies with tax laws and regulations and avoids potential penalties. If you have received letter for compliance check, VAT Inspection, Undisclosed Foreign Income, Code of Practice 8 Investigation or COP9 Investigation; we have tax experts who can help you. Call our office to discuss your case.