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February 14, 2018
HM Revenue and Customs (HMRC) has stepped up its compliance activity, as it continues in its efforts to claw back extra tax revenue. Being the subject of an enquiry or investigation can be a worrying experience, so what can you expect if you suddenly find yourself on HMRC’s radar? And is there anything you can do to make sure that an investigation runs as smoothly as possible?
Businesses are usually selected for a tax or VAT investigation at random, so they are never completely avoidable. However, inconsistencies or delays in producing returns or payments may attract HMRC’s attention, which could mean that they are more likely to investigate your business. As good practice, you should therefore:
Tax enquiries can vary in length and complexity. Depending on the nature of the enquiry, they have the potential to be resolved by a telephone call, but they can also be much more time consuming and disruptive to your business.
Following a recent pilot scheme and feedback from accountants, HMRC has agreed to change its approach to compliance checks that relate to corporation tax and income tax. Aimed at reducing the burden on business owners, the Single Compliance Process (SCP) will introduce a single framework with four different levels of approach that correspond to the level of enquiry needed.
Firstly, if you are selected for an investigation, do not panic. It could be that you have not done anything wrong, and HMRC has selected you at random. If you have been chosen for investigation, you will usually be notified by letter. This enquiry notice should tell you whether HMRC would like to examine a certain aspect of your business, or conduct a full enquiry. Full enquiry letters are usually easy to distinguish – they are lengthy and will query all aspects of your accounts.
It is important to gain professional advice from the start. As accountants, we are experienced in dealing with HMRC investigations and enquiries, and our expertise can make all the difference to the outcome if we are instructed to help at an early stage.
You will most likely be asked to submit your accounts or any other business records to HMRC, for them to assess your compliance with tax and VAT regulation. If you feel you have not been given enough time to collate your records, you must inform HMRC immediately. Check which documents are being asked for and consider whether they are necessary to judge the accuracy of your business accounts.
It is important to keep a record of any correspondence or exchanges with HMRC, for example dates, addresses and reference numbers. Make a designated folder, in which to keep any letters or correspondence relating to the enquiry and make sure you keep us up to date with any developments.
It is advisable to send any postal correspondence by recorded delivery and to make copies of any documents being inspected, in case you need them in the meantime. If computers or any other physical assets need to be taken away to be examined, make sure that you are given a formal receipt.
Individuals are often asked to attend a meeting with HMRC after submitting the relevant evidence. It is advisable for your accountant to be present at such a meeting to answer any challenging questions on your behalf. If you are unsure about any questions HMRC ask, do not try to answer them or guess; we can answer for you, or you can tell the inspector that you will provide the answer at a later date.
In preparation for the meeting, you can ask for an agenda ahead of time, as well as the estimated length of the discussion. During the meeting, request details of any errors that HMRC has found and try to ascertain which areas of your business pose a concern, so that you are able to assess the relevance of any subsequent questioning.
Once HMRC has reached its conclusion, you will be sent a written closure notice detailing the decision. You have a right to appeal against this decision. If your records were found to be incomplete or incorrect, HMRC has a responsibility to tell you what was wrong with your system and how it can be improved for the future.
It is unlikely that you will be penalised if you have taken ‘reasonable care’ and have sound systems in place. However, ‘carelessness’ will usually attract a penalty of up to 30% of the extra tax due, while fines for deliberate errors could be as much as 70% of the tax due.
We can work alongside you to ensure that your records are accurate and robust. However, if you are subject to an HMRC investigation or enquiry, we will guide you through the process and provide advice and support as required. Please contact us for more information.