Why could your Self Assessment tax return be investigated?

HMRC remains firmly committed to combating tax avoidance and evasion. In 2019/20, it raised £5bn in additional tax by tacking non-compliance. It prosecuted 4,123 people and custodial sentences totalling 3,347 years resulted (source: HMRC).

About 5m people filed a Self Assessment tax return online in January 2021 (source: GOV.UK) and pre-pandemic, reportedly, HMRC opened more than 300,000 investigations a year into Self Assessment tax returns.

Even if you haven’t made a mistake on your tax return and don’t have anything to hide, the prospect of an HMRC investigation can be worrying. So, what triggers an HMRC investigation, what does an HMRC investigation involve and what could be the outcome?

What is an HMRC tax investigation?

To ensure that you’re paying the right amount of tax, HMRC can investigate your financial records and tax affairs at any point. HMRC will write to you or telephone you to explain what they plan to investigate. If an accountant does your tax returns, HMRC will contact them (they should let you know immediately).

As well as Self Assessment tax returns, HMRC also investigates Corporation Tax returns, employers’ PAYE records, VAT returns and many other matters. HMRC can hold a full enquiry, when all financial and tax records are investigated, or focus just on a specific aspect (eg a recent Self Assessment tax return). Although less common, HMRC also makes random investigations, regardless of the quality of your accounts or tax returns, which potentially means all tax payers and businesses could be investigated.

What triggers an HMRC investigation?

Your filed tax returns are cross-referenced with data HMRC already holds on you or your business and anything significantly different throws up a red flag that can trigger an HMRC investigation. Discrepancies are unlikely to go unnoticed, because HMRC’s sophisticated data tools can automatically identify anything unusual.

So, for example, if your stated business costs increase significantly or your turnover is much lower, reducing your tax liability, HMRC may want to find out why. Caution is advised when completing your Self Assessment tax return, because mistakes, however innocent, can prompt HMRC investigations and claiming ignorance may not prevent a penalty.

HMRC investigations can be more common in sectors where concealing earnings by working “cash in hand” is more prevalent. And the information entered within your tax return could arouse suspicion if it’s at odds with norms for your sector or business type. Continually filing your Self Assessment tax returns late can also trigger an HMRC investigation, while tax investigations can result from third-party tip-offs.

What happens if HMRC investigates?

HMRC may request a home visit or want to see you at your commercial premises if you have them or your accountant’s office. Alternatively, you may be asked to attend your nearest tax office (you can bring an accountant or legal adviser with you).

HMRC can request information from third parties, while premises can be searched were necessary. The more serious the issue, the more scrutiny you can expect. And mistakes on a tax return can lead to HMRC looking back at those from previous years and if this reveals any other issues, it will lead to additional penalties.

You should cooperate fully with HMRC’s investigation. Don’t ignore an inspection or information notice, or refuse a visit, because it will only make matters worse. Post investigation, HMRC will write to you to summarise its findings and you can appeal if you disagree with the decision.

Consequences of HMRC investigations

When deciding a penalty, HMRC will consider the nature of the error, its effect on your actual tax liability, whether your action was deliberate or unintentional, as well as your level of cooperation with the HMRC investigation.

The harshest penalties for self-employed people result from deliberately concealing earnings or fraudulently inflating costs to reduce tax liability significantly. Penalties of up to 100% of tax actually owed can be charged, while you still have to pay your correct tax bill, of course.

If you’ve made an honest, relatively minor mistake, you can expect a more lenient outcome, especially if you bring it to HMRC’s attention. Some inspections prove fruitless for HMRC, with no additional tax to pay, although business owners can still lose significant time.

How to reduce the chances of an HMRC investigation

• Work with good accounting and filing software. It can prevent errors that trigger investigations.
• Don’t rush when completing your Self Assessment tax return. Mistakes are more likely that way.
• Make sure that all details are accurate and provide all information required.
• Don’t claim for non-allowable expenses. If necessary, find out about allowable expenses when you’re self-employed.
• Never conceal taxable income from HMRC or lie about your costs.
• If your costs or your income are significantly higher or lower when compared to previous years, explain why in your tax return.
• Get help from a reputable service provider to fill in or at least check your Self Assessment tax return. It can prevent errors.
• Retain sales receipts and invoices for all your business purchases.
• File your Self Assessment tax returns on time. Late filing can trigger an HMRC investigation.

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Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.