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Explained: What Small Business Owners Need to Know About Tax Audits

April 23, 2019 Tax Audit

Receiving notification that HMRC intends to carry out a tax audit on your business is the kind of news SME owners dread. But as unpleasant as their reputation is, audits are a standard part of the tax compliance regime and in most cases the subjects have nothing to worry about.

Understanding why a tax audit takes place, what they look for and how to stay out of trouble can avoid a lot of unnecessary lost sleep. Whether you’ve already had the letter from HMRC or just want to know what to do should it ever happen, this quick guide covers the key points.

Different types of audit

A routine tax audit is very different from a full-blown HMRC investigation. If you employ people and are registered for VAT, you may from time to time be picked out so tax inspectors can go through your records and check everything is in order. This is because Revenue knows PAYE and VAT are the areas where most mistakes are made with tax, so they take a proactive approach to ensuring things run a smoothly as possible. They are not looking to catch you out or punish you.

A full tax investigation, on the other hand, is triggered when HMRC suspects there is something wrong with your tax filings. This is where they will dig deep into your books and forensically analyse your accounting processes, fundamentally to look for evidence of wrongdoing and negligence. This is when tax audits can become a daunting, time-consuming prospect.

Avoiding investigation

They say the best way to keep out of trouble is to do nothing wrong. While there is no way to duck out of random audits on VAT and PAYE procedure, you can avoid HMRC coming down on you with the full force of its investigatory powers by making sure you do things by the book.

The things that most obviously raise suspicion with HMRC are drastic fluctuations in the figures you submit on your accounts and long periods of unprofitability (meaning you won’t have paid much tax in a while). Although it is perfectly possible for these eventualities to occur for valid and genuine reasons, it is important to have your books watertight to be able to demonstrate how and why.

Another thing that HMRC will eventually pick up on is regular mistakes in your tax filings. This is why it is important to check and double check your submissions, and if you have any doubts at all, seek professional advice. If mistakes on your tax returns stem from errors in your bookkeeping, you could find yourself in hot water for not following correct procedure.

In general, making a point of following best practice in all accounting and bookkeeping is the best protection against landing in trouble over an audit. Keeping accurate, up-to-date records will help you avoid mistakes in your tax filings and also ensure there is plenty of evidence to satisfy HMRC if they do come calling.

If you do find yourself facing an audit or would like some honest, professional advice on tax compliance, contact the KJG small business accounting team today.