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HMRC tax enquiries may sound daunting, but this doesn’t mean the government thinks you did anything wrong. However, it’s still important that contractors are aware of what an HMRC tax enquiry is in order to prepare for it fully. When HMRC open an enquiry into you or your business, they are checking in detail that the information on a tax return is complete and correct. Your submission may also be randomly selected for enquiry.

So, if you’ve been chosen for a tax enquiry, you don’t need to worry needlessly. As contractor accountants, we can help you to make sure you’re prepared for what comes after receiving a letter from HMRC.

What is an HMRC Tax Enquiry?

First of all, it’s crucial that you understand what makes up an HMRC tax enquiry and why you shouldn’t panic. A tax enquiry is the process by which the government checks the information on your tax return in detail; HMRC are looking to see whether these documents are filled out properly and in their entirety. You may have to answer a few questions to clarify something HMRC don’t understand or they may request that you send them specific documents. If you’ve inherited money recently, for instance, you may have to explain where it came from.

HMRC will ask you questions about your return through meetings and will also review your records, seeing as they have a right to open an enquiry into any tax return they wish. The enquiry may focus on the return as a whole or on specific points; the latter refers to specific parts of your files, such as certain information that is not clear or consistent.

This means that the information requested by HMRC will depend on the type of enquiry they’re launching. Usually, you have 30 days from the date of the letter to send the information HMRC is requesting, although this doesn’t happen all the time, with some deadlines being longer and other shorter. Additionally, you can request more time if you believe you can’t meet their deadlines for one reason or another; just let HMRC know as soon as you can make sure to agree to a new date together.

The investigation into your returns could last for several months or it could be quick; this will hinge on how serious your case is. The size of the business tends to matter too, as larger businesses will take longer to analyse. However, if you’re a one-man band as the owner of a limited company, it will probably take less time to complete the investigation.

Why is HMRC Contacting Me for a Tax Enquiry?

As we mentioned above, the government regularly checks a certain percentage of tax returns to ensure they are filled out correctly; sometimes, HMRC need more information than what is given in order to understand the numbers. They may have noticed a clerical error in your submissions or received an anonymous tip that there are discrepancies in your business as well.

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They can also check tax returns at random, so you may be one of the contractors chosen. Because this could happen to any contractor, it’s crucial that you keep all of your documents and important information properly and keep them until HMRC is no longer allowed to enquire about them. If you are unable to present HMRC with the records they request – for example, because you didn’t store them correctly and now can’t find them – you may be fined up to £3,000.

The type of work you do can have an impact on HMRC’s choice to include you in their random sample of returns as well, since some may be seen as a ‘higher risk’. In addition, the software the government uses can identify irregularities between your declared income and other sources of information, so it’s vital that all of your documents are in order and completely correct.

What Happens During an HMRC Tax Enquiry?

If HMRC wishes to conduct a full enquiry, they will likely review every single point in your tax return in-depth; if needed, your business records will also be analysed.

HMRC will ask for you to send them specific documents and information, although they may also request to review information on-site, be it your home or your office. You’re not obligated to attend a meeting with HMRC; however, should you choose to do so, it’s crucial that you know your rights. Additionally, you may want to enlist the help of your tax specialist instead of going alone.

All information you provide to HMRC needs to be accurate. You may be fined otherwise. This includes giving the wrong information by accident, be it because you had the wrong data or because you didn’t know the answer but took a guess. If you don’t know what to say to HMRC, be truthful and ask them for time to find the correct answer.

Usually, the type of information requested by HMRC include bank statements, invoices and expense receipts, as these can help them to determine whether your business is in order. The government can also investigate companies that have closed down, as well as reopen cases that have been settled if they deem necessary.

So, know what is expected of you and what you can expect from HMRC ahead of time. If you’re still unsure about your rights or what to say should they request a meeting, talk to us and we’ll be happy to help you during this process.

While each case will be different, you can more or less expect the same typical steps during your tax enquiry. These stages may include the following:

  • Receiving a letter from HMRC – first of all, you should always check whether the deadline to open an enquiry has passed or not; in addition, you’ll want to verify if the information requested is sensible and to challenge HMRC if you think it isn’t.
  • Formal request – you will receive a formal request if you don’t comply with the original request for information, and you may also be penalised for missing deadlines. HMRC will ask that you clarify certain information.
  • Potential meeting – HMRC may want to meet in person, which can help to speed up the enquiry process – and can signal to the government that you’re happy to cooperate. Make sure you receive an agenda beforehand, so you can be prepared to answer any questions.
  • The meeting – keep to the agenda, clarify concerns and send information after the meeting if you can’t remember something while talking to HMRC. Ask questions if you’re unsure about what you’re being told or asked. Giving an answer you’re not fully comfortable with because you feel like you need to say something is a mistake – you can be penalised for giving HMRC false information, even if you didn’t mean to. Knowing your rights is key; if HMRC wander away from the agenda, you are entitled to request a stop to the meeting, for example.

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What About Tax Fraud?

If there are errors in your tax submissions, HMRC may believe you committed tax fraud and investigate you for it. If this is the case, then you should seek professional advice immediately in order to protect yourself. At Gorilla Accounting, we have been helping contractors for many years, so we will be happy to discuss your case with you.

But what exactly constitutes tax fraud? Simply put, this refers to deliberate acts that result in personal gain at the expense of the government, which means actions that caused HMRC to lose tax. These acts may include smuggling goods, not declaring all of your sources of income, and intentionally trying to cut down your tax bill by omitting, concealing or misrepresenting information in your submissions.

What Happens After the Enquiry?

Once the review into your business and tax returns has been completed and nothing wrong was found, HMRC will send you a closure notice. This notice means their enquiry is closed and there will be no changes to your submissions; in fact, HMRC will let you know that they accept the submission you made. If you’ve overpaid tax, your returns will be revised, and you’ll receive a repayment – this will include interest from the date of the incorrect payment up until you receive your money back.

However, if you’ve paid too little tax, you will have to change the return and pay what you owe within the first 30 days of notice. Of course, if you believe you’re in the right and HMRC have the wrong figures or information, it’s important that you challenge their review.

If HMRC believes you’re guilty of fraud, you will be charged penalties on top of the extra tax and interest you will have to pay. It’s likely you will have to sign a formal contract explaining that you agree to pay these fees and overdue tax and, in exchange, HMRC won’t charge you for income tax and class 4 national insurance contributions for the years in question. If you are unable to reach a deal with HMRC, they will likely utilise their legal powers to assess your case in a way they believe is best, which may not be beneficial to you.

FreeAgent Can Help You to Keep on Top of Your Documentation

It’s crucial that you understand the importance of HMRC’s tax enquiries; so, while you shouldn’t panic, you should take their letters and requests seriously and ensure there are no delays in your replies. If you’re under investigation, you may want to ask for the help or advice of professionals who specialise in these issues, so that you can be confident your case will be resolved quickly and painlessly.

As we mentioned, some tax returns may be randomly selected for investigation – however, more often than not, the submissions chosen tend to present incorrect or incomplete information. If you want to do everything in your power to prevent this, then you need to have your documents in order.

This couldn’t be easier with FreeAgent bookkeeping software, which allows you to store all of your tax-related information in one place, offers real-time data you can access from any device, allows you to upload receipts and manage expenses, automatically uploads bank transactions daily, and so much more. With this, you can rest assured that your tax returns will be filled out properly and on time.

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At Gorilla Accounting, we believe it’s important you know what to expect if HMRC contacts you for a tax enquiry. You have the right to appeal against decisions you don’t agree with, including penalty charges, and may even request a stop to the investigation if you think it’s unfounded. To do this, you need to make sure you’re in the right, which our friendly team can help you with.

Meanwhile, why not make use of our contractor tax calculator to figure out your take-home pay or check out the benefits you get from choosing us as your limited company accountants?