It can be a worrying time if HMRC decides to conduct a tax investigation, regardless of whether you’re a sole trader/ self-employed or the owner of a company. HMRC put a lot of effort into combating tax avoidance or tax evasion – but exactly how far back can HMRC investigate?
Read on to learn more about HMRC tax investigations, including some potential triggers for a HMRC investigation and how far back HMRC can investigate.
Why Would HMRC Investigate Me?
There are a number of reasons why HMRC may decide to investigate you. One of the main reasons that you may be investigated by HMRC is if you make errors in your tax return – as well as paying owed tax late or filing your tax return late (e.g self-assessment tax return).
Likewise, if HMRC notices any inconsistencies in your tax returns (for example, an unusual increase in costs or a sudden drop in income), then they may decide to investigate you.
Having offshore accounts may trigger an investigation by HMRC, as can operating businesses in a high-risk industry (e.g those that typically take cash such as pubs and launderettes). HMRC may also decide to target certain industries.
Some other reasons that HMRC may decide to investigate you include investing in schemes that HMRC view as ‘tax avoidant’ schemes, receiving income from property, and inconsistencies in costs (e.g costs are higher than industry standards or returns don’t match how busy your business is or reflect your standard of living).
HMRC could also receive a tip-off, which may lead to you being placed under investigation. That being said, HMRC carries out random investigations every year to target potential tax evaders that would usually slip under the radar. Regardless of whether you’re a business owner or a private individual, you may be randomly selected for a HMRC tax investigation.
If you want to lower the risk of HMRC investigating you, we can ensure that your accounts are all in order. At LJS Accounting Services, we can also assess your options in the event of a HMRC investigation, giving you guidance in a straightforward manner. This will allow you to make an informed decision on your finances and your business.
The HMRC Investigation Process
First of all, you’ll receive an official letter from HMRC – this typically comes in a brown envelope with ‘HMRC’ written on it. This letter will inform you that HMRC is investigating you.
You’ll be required to provide them with all the information they require – providing documents such as bank statements, receipts, invoices, and general financial records.
If you don’t think HMRC have grounds to investigate you, you can argue against the decision. In some cases, it may be a small discrepancy that is flagged up to HMRC, and you may be able to resolve this without a large investigation. However, this won’t always be successful – and the decision ultimately lies with HMRC.
The more serious the case, the more intense the investigation will be. HMRC may request to vision your premises – or for self-employed sole traders, your home. You may also need to meet HMRC at the nearest tax office, or at your accountant’s office.
Be sure to cooperate with HMRC to ensure that the investigation goes as smoothly as possible. If you decide to ignore HMRC or refuse their requests, then there may be consequences.
How Far Back Can HMRC Investigate?
The extent of a HMRC investigation depends entirely on the circumstances of the case. If the discrepancies are relatively minor, then HMRC will just focus on the last few years. However, if further errors are discovered, they may decide to investigate further.
HMRC states that they typically make an assessment within six years of the tax period in question in cases where too much has been repaid due to careless behaviour of either the individual or the accountant.
However, if deliberate behaviour is expected, HMRC may enhance their investigation – investigating as far back as 20 years. Likewise, if there are more mistakes in your tax returns, HMRC will be more likely to investigate a longer period of time.