Why all businesses need to prepare for a tax investigation

HMRC has (mostly) left businesses alone since the beginning of the Covid-19 pandemic. The Government rightly offered a lot of financial support to businesses when lockdown measures were introduced, with a focus on expedient delivery of the support. Checks to guarantee the validity of claims were less stringent than usual in order to get cash to businesses as quickly as possible.

Now, HMRC are back with a vengeance. The department knows that Covid-19 support measures were particularly open to fraudulent claims, and they intend to recoup as much as they can. So, if your business received government support in the last 18 months, you can expect to hear from HMRC – even if you were completely within your rights to claim it.

At this point, you may be thinking that your business is fine. You know you were entitled to government support, you know you made no fraudulent claims. Unfortunately, you still need to consider your options, because fighting an HMRC investigation (regardless of guilt) can cost you thousands.

How much can it cost if I didn’t do anything wrong?
Last year, a client of ours was approached by HMRC with a spurious claim, demanding the business pay an additional £600,000 in VAT. The client was initially intending to pay the bill, assuming that HMRC would only request such a sum if they were entitled to do so, and not wishing to incur additional costs.

However, following a discussion with us, the client decided to challenge the claim. A date was set for a tribunal to determine the outcome, but the day prior HMRC decided to withdraw their case. A happy ending, in theory, except just preparing to take on HMRC invoked a bill of more than £50,000. Fortunately, this client had taken out our Tax Investigation Service.

The main takeaway here is that simply defending yourself against HMRC can run up an almighty bill even if you’ve done nothing wrong. If you don’t have the reserves to fight something like this off, you may want to take a look at how we can help.

The second key point is that HMRC will try their luck. Their caseload is huge at the moment and the pressure to recoup funds is immense. If they’ve got an inkling they might be able to claim funds from your business, they’ll go for it.

What to do if HMRC contact you

1. Seek professional advice
   There are several ways that HMRC might contact a business to find out more about its affairs. This could range from a “nudge letter” which is a bit of a fishing exercise, essentially saying “are you sure there isn’t something you should tell us?”, to a full scale, all aspect enquiry, which will ask for huge amounts of information.
   
   In either case, a professional will be able to confirm whether or not the inquiry is valid and has been requested within the relevant time limits. They will also check that HMRC is only asking for the information it is entitled to, and that the department states the risk it is attempting to cover off with its enquiry.
   There may be times, for example, when HMRC has got the wrong person; it’s much better to discover this at the start, rather than mid-way through an investigation which your business would have to foot the bill for.
   
2. Engage with HMRC
   Many businesses attempt to shy away from conversation with HMRC, believing that anything they do share can and will be used against them. While this is true in the case of serious wrongdoing, in most circumstances you just need to engage with HMRC to help it understand your tax affairs.
   
   Approach with caution, however. The scope of HMRC’s enquiries and interventions must be within legal boundaries and time restrictions of what it is allowed to request. A professional will be able to help ensure this is not breached.
   
3. Be honest
   If you believe you’ve made a genuine mistake which HMRC have uncovered, it’s best to admit this early on. Not only will this avoid hiking up fees to defend the inquiry, but it will also result in a smaller penalty from HMRC – and bring an end to the inquiry.

It can be daunting when HMRC get in touch – something the department uses to its advantage. Make sure you’re protected and only handing over pertinent information when you are required to do so. Equally, don’t assume that behaving perfectly legally won’t cost you! You might not get a bill from HMRC, but you could get one from your accountant.

Our Tax Investigation Service is designed to protect businesses in the event of an HMRC inquiry. For more information on the service, please click here or get in touch.

Dominic Bourquin