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HMRC Tax Investigation – 10 Reasons HMRC Might Audit Your Tax Return

Published by UK Property Accountants
Published Date: January 4, 2023
Categories: HMRC, Tax Return

You might be wondering how or why your tax return was picked by HMRC Tax Investigation. What is it that went wrong? Or what are the things that you need to consider when submitting a tax return?

If you are struggling to find the answer, you have come to the right place.

Below are a few reasons why your tax return might be picked by HMRC Tax Investigation.

1. You have an Inconsistent Tax Return

One of the major reasons why your return was picked might be because your expenses have grown exponentially compared to your past records.

Or,

Your income has shrunk significantly compared to your past year’s trends.

HMRC Tax Investigation-Inconsistent Tax Return

Let me break this down for you with an example:

One of your tenants leaves your property and the property stays vacant for, let’s say a year.

In the meantime, you repainted the house, fixed that barely working sink, replaced the old door, and made the place ready for the new tenant.

Now, when you prepare your tax return for the year. There has been a drastic decrease in your income while your expenses have increased significantly.

HMRC might see this as an inconsistent tax return.

In this case, they are likely to question, why the figures have changed so dramatically and ask you for supporting documents. They will let you off the hook if you provide them with reasonable reasons.

The key takeaway here is, do not throw away those bills, keep them safe as they might come in handy.

2. There is a Perception that the Industry You Work in is a High-risk Industry

HMRC has a large database and power to access information both within and outside the UK. It helps them build a good understanding of different industries and identify industries where there is a greater risk of not disclosing and paying the right amount of tax.

If you work in these high-risk industries, there is a high chance that your tax returns are reviewed in detail.

3. There are Regular Mistakes in Your Return

Though you can change your tax return 72 hours after you have filed it, making these mistakes more often can put you under the radar for HMRC.

Some directors try to omit certain things in their tax returns to pay less tax. Activities such as these can attract HMRC Tax Investigation.

4. Your Company has Been Unprofitable for Years

If you have shown unprofitable business for years, it might attract attention from HMRC.

They might have general questions such as how the business is still operating if there are no profits. Where are they getting cash from? etc.

In such cases, it is best if you notify them of how your business functions when it is not making any profit, and where it gets its cash.

5. HMRC has Regularly Penalised You

HMRC can charge you a penalty if you make an error, if there is an understatement of tax liability, if you have missed your deadline, etc. The reasons can go on and on.

HMRC Tax Investigation-Regularly Penalised

If this is happening regularly, HMRC can get suspicious of your activities.

Thus, they would monitor your tax returns very closely. You are also likely to come under investigation if they need more information.

6. You have Made Frequent Amendments to Your Tax Return

Mistakes are inevitable, while HMRC considers genuine amendments. However, if they occur frequently, HMRC may have opened an investigation into your tax return.

7. HMRC has Found Undisclosed Profits from Third Party

HMRC can get information from third parties such as banks, land registry, council etc. If HMRC finds out you have undisclosed income, they will likely open an investigation under your name.

Some of the popular programmes that HMRC operates for undisclosed profits are: Let Property CampaignDigital Disclosure Services, etc.

8. Directors in Your Company Earn Less Than the Employees

You might have learnt by now, that if something looks out of place it is likely to be caught by HMRC.

Director has more power in the company, especially if it is a small-owned business; there is a chance that he might use some tax avoidance scheme to avoid paying taxes. HMRC knows this well.

So, when you see a director earning less than their employees, HMRC is likely to point out.

9. Your Return was Selected on a Random Basis

Yes, your return can still be picked up even if you have complied with all the requirements.

10. You do not have an Accountant

Accountants are trained to ensure your books are up to date and your business meets the compliance requirements.

Though having an accountant does not guarantee your returns would be free from any error. They do help to minimise errors.

HMRC Tax Investigation-No accountant

This also helps HMRC boost your trustworthiness.

Not having an accountant can indicate you do not want your third party to see your finances and that mistakes are being made due to a lack of experience and knowledge in the field.

Both reasons are valid to attract HMRC Tax Investigation.

Do you have more queries?

We at UK Property Accountants have efficiently helped many clients deal with HMRC investigations. If you have any tax enquiries or need some advice from us.

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