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Whether you run a small business from your garage or manage a large company, paying the right amount of tax is super important. While there are legal ways to reduce how much tax you pay, making mistakes – even by accident – can land you in hot water with the tax office.
You might think, “I’m too small for the tax office to notice me,” but that’s not true at all. HMRC can investigate any business, no matter how big or small. Even if you do some weekend work on top of your regular job, you need to report that income and pay taxes on it.
How Do You Find Out You’re Being Investigated?
Nobody shows up at your door with a magnifying glass. Instead, you’ll get an official letter from HMRC saying they’re looking into your tax affairs. They might ask you to show them things like:
- Your bank statements
- Receipts for things you’ve bought for your business
- Bills you’ve sent to customers
You cannot ignore this or throw it in the trash. You need to work with them and show them everything they ask for.
How Far Back Can HMRC Look?
Usually, HMRC looks at your last four years of tax returns. But if they think you’ve been really careless with your bookkeeping, they might go back six years. And here’s the scary part – if they suspect you’ve been deliberately cheating on your taxes, they can look back 20 years! That’s basically your entire business history.
Why Do They Start Tax Investigation?
Sometimes, it’s just random – like being picked out of a hat. If you’ve done everything right, you don’t need to worry. But several things might make HMRC want to take a closer look:
Someone Tipped Them Off: Maybe someone who worked for you or did business with you told HMRC something suspicious. For example, if you only take cash payments and never give receipts, someone might think that’s fishy.
Repeated Mistakes Everyone makes mistakes, and HMRC understands that. But if you keep making the same mistakes over and over, they might think you’re doing it on purpose.
Weird Income Patterns If your business made £50,000 last year but suddenly only makes £5,000 this year, HMRC might want to know why. While it’s normal for businesses to have good and bad years, big changes need explaining.
Never Making a Profit If your business has been running for years but never makes any money, HMRC might get suspicious. They might think you’re hiding your real income.
Industry Comparisons HMRC knows roughly how much money different types of businesses usually make. If you’re a one-person dog-walking business claiming to make millions, that’s going to raise some eyebrows. Similarly, if you’re a big company claiming to make very little, they’ll want to know why.
Unusual Payment Patterns If you’re the boss but you’re paying yourself less than your employees, HMRC might think something’s wrong. They also look for missing payments, such as if you’re doing work but not reporting the money you get for it.
What Happens If HMRC Find Something Wrong?
The outcome really depends on what they find:
If You Made Honest Mistakes: You might need to pay the correct amount of tax you should have paid. Sometimes, people even get money back if they find out they paid too much tax!
If You Deliberately Cheated: This is where it gets serious. You’ll probably get fined, and the fine can be big depending on how much tax you didn’t pay. In really serious cases, you might even end up with a criminal record.
When Does It All End?
The investigation ends in one of two ways:
- You get a “decision notice” that tells you exactly what HMRC found and what you need to pay
- You reach a “contract settlement” where you and HMRC agree on how much you need to pay
The main thing to remember is that HMRC can investigate any business at any time. Remember, most tax investigations aren’t about putting people in jail – they’re about making sure everyone pays their fair share. If you’re honest and organised with your taxes from the start, you’ll have nothing to worry about if HMRC comes knocking.
Tax Accountant can help with HMRC Investigations: If you have received letter for compliance check, VAT Inspection, Foreign Property Income, Code of Practice 8 Investigation or Code of Practice 9 Investigation; we have tax experts who can help you and save on penalties and taxes.