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Running a business as a self-employed individual can be both rewarding and challenging, but one of the more daunting challenges is the possibility of an HMRC investigation. If you’ve received a letter from HMRC or suspect you might be under investigation, it’s important to understand why these investigations occur, what they involve, and how to protect yourself.
Why Might HMRC Investigate the Self-Employed?
HMRC carries out investigations to ensure individuals and businesses are paying the correct amount of tax. For the self-employed, several red flags can prompt an investigation, including:
Inconsistent income reports: Large variations in declared income year-on-year can lead to suspicion.
Missing tax returns or late filings: Failing to submit tax returns on time or not at all may trigger HMRC to investigate further.
Inaccurate expense claims: Claiming expenses that don’t qualify as allowable business costs.
Unusual transactions or discrepancies: Unexplained payments or errors in financial records can cause concern.
Random checks: Some self-employed individuals are selected at random for compliance checks.
How far back can HMRC investigate my tax returns?
HMRC can typically investigate up to four years if they believe you’ve made an innocent error on your tax return. However, if they suspect carelessness, this period extends to six years, and in cases of deliberate tax evasion, HMRC can investigate up to 20 years of your financial history.
What Happens During an HMRC Investigation?
Once HMRC decides to investigate, they will typically notify you in writing. There are three levels of investigation:
Full Enquiry: HMRC examines the entirety of your tax affairs, looking for any errors or omissions.
Aspect Enquiry: HMRC focuses on a specific aspect of your tax return, such as income or expenses.
Random Check: You may be selected for investigation even if HMRC has no particular concerns.
During an investigation, HMRC may request a range of documents, including:
Bank statements (both personal and business)
Receipts for expenses
Invoices issued to clients
Contracts or agreements
You will be asked to explain any discrepancies or provide additional information to clarify your financial situation.
What Are the Possible Outcomes of an HMRC Investigation?
At the end of the investigation, there are a few potential outcomes:
No further action: HMRC is satisfied that your tax returns are accurate.
Amended returns: HMRC may ask you to amend your tax returns if they discover mistakes.
Penalties and interest: If HMRC finds that you’ve underpaid taxes, you may face penalties and interest charges on the unpaid amount.
Criminal investigation: In cases of serious fraud or tax evasion, HMRC may launch a criminal investigation, which could result in prosecution.
How Can You Protect Yourself During an HMRC Investigation?
Facing an investigation can be stressful, but there are steps you can take to protect yourself and ensure a smoother process:
Keep accurate records: Ensure that all financial records, including income, expenses, and bank statements, are kept up to date and stored safely.
Submit tax returns on time: Avoid missing deadlines, as this can increase the likelihood of being investigated.
Claim allowable expenses only: Be cautious when claiming expenses. Only claim those that are directly related to running your business and are allowable under HMRC rules.
Seek professional advice: If you’re unsure about how to handle an HMRC investigation, consider seeking professional advice from tax specialists.
What expenses can I claim as a self-employed individual to avoid issues with HMRC?
You can claim a variety of expenses related to your business, such as office supplies, travel costs, and professional fees. However, it’s important to only claim allowable expenses that are directly related to running your business. Claiming personal or non-business-related expenses can trigger an investigation.
Can HMRC investigate me if I’m no longer self-employed?
Yes, even if you’ve ceased trading or retired, HMRC can still investigate your past self-employed activities if they believe there are outstanding tax liabilities or discrepancies in previous returns.
What should I do if I can’t pay the additional tax owed after an investigation?
If you are unable to pay the full amount of tax owed after an HMRC investigation, you may be able to negotiate a Time to Pay arrangement. This allows you to pay the debt in instalments over an agreed period. Our team at Tax Dispute Experts can assist you in negotiating favourable terms with HMRC.
How Can Tax Dispute Experts Help?
At Tax Dispute Experts, we understand the complexities of HMRC investigations and the pressure they can put on self-employed individuals. Our experienced team is here to guide you through every step of the process, from understanding your obligations to negotiating with HMRC on your behalf.
Whether you're facing a random check or a full enquiry, we can help you compile the necessary documentation, respond to HMRC requests, and reduce the risk of penalties.