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Tax Tip

How do HMRC conduct an investigation?

HMRC can launch an investigation into a business at any time within the statutory time limits, enquiry notices are usually timed to be issued at specific times of the year in order to control work flow within the department.

The initial letter from HMRC can be quite intimidating as it will often embrace every single aspect of the business and will often be a standard template padded out in parts by reference to the particular client.

Stuart Coleman, Manager of the Tax Department of ABDS comments:
“A favoured time of the year is the end of January when we are hoping clients may have avoided an enquiry only to have those hopes dashed by an enquiry notice dated right at the very end of the month. Fridays are another favoured time for issuing enquiry notices; start off on Monday morning with a letter from HMRC.”

HMRC try to impose a non-statutory time limit on the taxpayer for the production of the information requested in the opening letter. It will often not be possible to provide this within the time frame specified, and it is advisable to make contact very quickly with HMRC if this is the case and agree an extended deadline.

Stuart Coleman again:
“HMRC have a number of ways to decide who to investigate. One method is to compare the results of the business to other similar businesses. This will produce statistics such as gross profit margin, mark-up rate and comparisons to earlier years. The problem is that if a case is “risk assessed” the officer cannot decline the invitation to investigate. Officers have quite openly admitted that they had no choice but to open an enquiry, even though they knew that there was nothing in it for them, because the risk assessment process had identified the case as warranting an enquiry.”

Consistency is the answer. HMRC will expect turnover to be fairly level whilst accepting modest fluctuations in either direction. If turnover goes down it will expect expenses to decrease. If profit goes down HMRC will raise an eyebrow if proprietors’ drawings/directors remuneration goes up!

However, if turnover takes a dramatic uplift, HMRC will be suspicious that maybe not all the turnover in the previous year was declared. If it drops significantly then maybe some has been taken by the owner and not declared?

Proprietors’ drawings will be similarly scrutinised – a substantial increase could mean that drawings may have been understated in the past. If the drawings are less than the salary paid to the highest paid employee HMRC will be very uneasy – business owners are expected to be the highest earners in the business!

The gross profit GP of the business will be examined over a period of up to 6 years to see whether or not it is consistent. It will also be compared to similar businesses and fluctuations of more than 3% will arouse suspicion.

Because of their position, they can draw on a wealth of knowledge and experience from similar sectors of the business world in order to benchmark and analyse individual cases. HMRC will often target a particular sector because it has become aware of consistent malpractice across the sector.

Security companies have been under the microscope for a while now, mainly because it is known that many of them engage guards as self-employed workers but the reality is that they are employees. Likewise, medical practices, dentists and vets are targeted because they engage locums as self-employed workers.
Lifestyle is also a means by which HMRC will start an investigation. Concerns as to whether or not an individual has the means to finance his standard of living. Information will be gained in this regard from a variety of sources, giving HMRC details of property owned, cars, boats, bank accounts, horses etc.

Tip offs from jealous neighbours or work colleagues is also a major source of information, some of which may be malicious but some may be true. HMRC will also look at local adverts advertising services and check as to whether the business is registered.

If you need any help and advice on HMRC campaigns and the benefits of belonging to the ABDS Fee Protection Scheme, contact Lavinia Newman, Stuart Coleman or Tonmoy Kumar NOW to discuss how ABDS can help


ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail: abds@netaccountants.net

Brilliant with numbers   
Great with people  
Clear and precise with advice
Timely and cost effective 
In touch with issues that face our clients
Mindful of our client’s long term strategic goals

Helping Your Business is Our Business
 

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