During 2019 HMRC opened 300,762 investigations into self-assessment tax returns and collected an additional £1.2bn in extra tax as a result during the 2018/19 tax year. HMRC continues to come down hard on taxpayers that make mistakes on their tax returns.
Taxpayers should always file complete and accurate tax returns as errors can lead to an investigation and often penalties. Taxpayers who file their tax returns late can be more likely to attract the attention of HMRC.
One of the ways in which HMRC will identify errors on a tax return is to cross-reference the completed tax return with data it already holds on taxpayers. They have specialist software which is becoming more advanced all the time and any discrepancies can lead to an investigation. If it is considered that there is a high risk of tax underpayments HMRC will look into a taxpayers lifestyle to see if this matches the income declared.
An investigation, even a very basic investigation, can drag on for months and taxpayers often find this very stressful. A more in-depth investigation can take up to two years. If HMRC finds a mistake in one year, depending on the type and seriousness of the mistake they may also look at earlier years.
Where an investigation by HMRC is successful not only will the taxpayer have to pay the tax owed, but a penalty may also be payable. The penalty will depend on whether the errors and mistakes were made deliberately or not. Penalties range from 30% where there has been a failure to take reasonable care up to the harshest of 100% for deliberate mistakes.
What can I do to avoid a Tax Investigation?
- Never leave completing your tax return until the last minute. Do it early so you have time to review it fully before submitting.
- Ensure you include details of income and financial interests from all sources. (including shares, savings interest, etc.)
- In the additional information box, give details of any changes, unusual increases or reductions in your income.
- Ensure you understand expenses that you can claim tax relief on and those you cannot.
- Appoint a qualified accountant to complete the return on your behalf.
- If self-employed, maintain good bookkeeping records.
Taxpayers can protect themselves against the cost of an investigation by taking out the appropriate cover. This can be a Tax Investigation service/insurance through their accountant or included in their general business insurance. It should be noted that if the cover is not through your accountant the policyholder may require you to use an adviser of their choosing.
If you have any questions about tax investigations or protection against them, do not hesitate to contact us to discuss this further
February 26th, 2020