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A visit from the tax man: Preparing for an HMRC investigation

Be prepared: HM Revenue & Customs can visit anytime

If you’re an entrepreneur working from home, it’s a good idea to keep your house in order tax-wise: legislation, which came into effect in April 2009, relating to inspection means that you can expect a visit from the tax man at any time.

Business (and home office) premises inspections

HM Revenue & Custom powers now allow inspectors to enter any business premises – unannounced – to check the ‘tax position’ of any individual or company. Impromptu inspections can be carried out whether a tax return has been made or not, and can take place within a return period that has not yet closed.

Business people and sole traders who claim expenses for ‘use of home as an office’ should be aware HMRC inspectors even have the right to enter their home to check on business records.

The legislative changes were part of HMRC’s continuing programme to better co-ordinate inspection work across corporation tax, VAT and PAYE. The rules aim to modernise and align statute and practice across the whole range of taxes and duties.

Allowing HMRC access to records

Appeals against notices are much more difficult than prior to the current regime. You cannot appeal a request for statutory records, for instance, as HMRC has an absolute right of access to statutory records.

The powers also make it easier for HMRC to carry out systems audits because taxpayers are obliged to provide reasonable assistance to HMRC when looking at computer records for the purpose of checking a tax position.

Avoiding penalties

Much of the discretion formerly exercised by HMRC in not charging penalties has been removed by these legislative changes, and HMRC can now use its powers to charge penalties in relation to any tax position which gets adjusted where the taxpayer cannot show that reasonable care was taken in making the return.

There are three main reasons for incurring tax penalties:

  • Sending a tax return or document which isn’t accurate
  • Failing to tell HMRC you have a tax liability
  • Breaking one of the rules for VAT or Excise

A detailed breakdown of the different charges can be found on the HMRC website here.

Penalties are worked out on a range basis, based on the following considerations:

  • Whether you were forthcoming in telling HMRC either about an inaccuracy or that you hadn’t notified them you owed tax
  • How forthcoming you are in assisting HMRC with working out what extra tax is due
  • Whether or not you give HMRC easy access to your records to check their figures

Charges can vary considerably but it pays to be as transparent and honest with HMRC as possible, ideally from the outset so you and your business don’t have anything to hide if you do receive an unexpected visit from the tax man.

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