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What can lead to a tax inspection?

There are a number of reasons why a firm might be more likely to find itself singled out for a tax inspection, but HM Revenue and Customs (HMRC) also maintains that it carries out random inspections, so any business could potentially find itself subject to scrutiny.

The Government has allocated a total of £900m to reducing the problems of tax fraud and evasion, while stating that large companies are now being monitored more closely than before. However, this does not mean that the owners of small businesses can rest on their laurels.

Errors, lateness and fluctuations in figures can lead to an inspection

Any firm that continually submits its tax returns late is more likely to trigger an investigation by HMRC. An estimation will have to be made regarding the amount of tax the business owes. Penalty fines will also be applied, due to missed deadlines, and interest may be charged.

Mistakes on a tax return, or incomplete returns, can lead to a business being inspected by HMRC. That means it is vitally important to carefully check through a completed tax return, looking for any inaccuracies or missing figures, before submitting it.

In some cases, the figures shown on the tax return for a particular business may fluctuate widely from their usual pattern, which could spark an investigation. For example, if a firm’s expenses suddenly shot up one year, this might lead to a visit from HMRC even though there could be an innocent explanation behind the change.

One way to make an investigation less likely is to add an explanation on your tax return, using the extra space provided, if any figures have changed dramatically compared with previous years. It is also important to keep accurate records and receipts to back up your explanation.

Reasons that a business cannot control

Although most tax inspections will be carried out because HMRC has a reason to believe that something is wrong, sometimes an inspection may be launched that a firm could not have done anything to avoid. For example, your business may just happen to be included in the seven percent of firms that receive one of HMRC’s random inspections.

Tax inspections are more likely in certain lines of business, such as the building industry. Cash-based enterprises are also subject to a higher amount of inspections.

Reducing the risk of a tax inspection

As well as ensuring returns are submitted on time, carefully checking forms for errors and omissions, and explaining any anomalies, businesses can choose to use the services of an accountant to help ensure that their tax affairs are in order.

However, a professional can only work with the information supplied by a client, so it is important for businesses to make sure that they keep accurate records.

Should an inspection take place, your business’ financial records will be taken away by HMRC and, subsequently, officials will ask questions to establish whether there are, in fact, any problems. Genuine mistakes tend to lead to lower fines, but the highest penalties can be as much as 100% of any tax owed, plus interest.

If all is well, an inspection will cause nothing worse than inconvenience.

Posted by Mark
June 30, 2014

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