What are HMRC Audits? A Guide

At some point in time, over the course of a company’s history, it’s highly likely that the business will be subject to a tax inspection or audit from HM Revenue & Customs. Regardless of the size and scope of the business in question, chances are that HMRC has been closely monitoring its tax matters. 

If there’s any indication that there may be some potential gaps, inconsistencies, or insufficient tax contributions, HMRC may push forward with an audit to ensure that all taxation affairs are in order. 

And while the majority of inspections and audits are straightforward, it’s crucial for a business to understand the fundamentals of an HMRC audit and prepare accordingly. Here are some of the most important things a business owner should be aware of when it comes to facing a tax audit from the HMRC. 

What is an HMRC Audit?

Essentially, an HMRC audit consists of HM Revenue & Customs looking through a company’s accounts in order to make sure that its business tax records are accurate, by the book, and that it has been paying the correct amount of tax. 

For an HMRC audit, an appointed tax officer will pay a visit to a place of business, where they’ll conduct a review of that company’s details and books to confirm what was stated on their tax returns is accurate. The following aspects of a business may be assessed during an HMRC audit:

• The property from which a business operates 
• The number of employees a business has
• Any equipment used for the business
• A full breakdown of a company’s tax records 
• Any systems or documents used in everyday business management

Businesses that are going to be subject to an HMRC audit will usually be notified in advance by letter. This letter will elaborate on what the audit will be looking into, and whether the audit is a full inspection of an entire business or a quick check of individual tax records. 

HMRC can choose to perform an audit on any tax return submitted over the course of the last 12 months, though they can also go much further if they see fit. If any issue is found, HMRC may notify a business and give it time to redeem this problem and become compliant. However, many of these rectifications will also come with a penalty fee. 

The Different kinds of HMRC Audits

Generally speaking, a business can expect to have one of the following 3 kinds of HMRC audits. 

• A full HMRC enquiry 

For a full audit, HMRC will look through all business records and potentially even the accounts and taxes of a company’s directors as well. HMRC has possibly spotted or suspected a considerable error or even full-on tax evasion for an audit of this nature.

• An aspect enquiry 

This audit will predominantly focus on one area of a company’s accounts. It won’t be a full enquiry into all business affairs, instead reviewing a specific aspect of a company. This enquiry will usually be due to a simple and honest error that needs to be checked out further by the HMRC.

• A random audit 

HMRC has the right to review the accounts of any business it chooses. If this should occur, the audit isn’t due to anything a company has done and is simply an audit at random.

Reasons why a Business may be subject to an HMRC Audit

There are many reasons why a business may incur an HMRC audit. But generally speaking, an audit will be conducted because HMRC has noticed some potential problems, inconsistencies, or inaccuracies with a recently submitted tax return. 

Other reasons for a business to be subject to an HMRC audit include the following below: 

• Noticeable and large inconsistencies in tax returns without explanation 
• A tax return that’s not in line with other businesses within the same industry 
• A tax return that’s deemed inconsistent with an individual’s standard of living 
• An anonymous tip from someone about the tax affairs of a company 
• The entire industry of a company has been deemed as a “high risk” 
• A company has consistently filed late and poorly maintained tax returns 

In some cases, a business may even get a visit from an HMRC officer posing as a civilian who will conduct a transaction and then look into how a company recorded that same translation. 

While all of the reasons stated above are possible, the potential for a business to be subject to an HMRC audit at random is still highly probable, and the reasons for such an audit are nothing to do with any suspicious activity. 

Preparing for an HMRC Audit

If the reason for an HMRC audit stems from some kind of inaccuracy or inconsistency with a company’s tax records, it’s important to discuss this matter with the accounting department and get those records looked into further. 

A company should always provide the most accurate information possible while HMRC conducts the audit, as hiding any relevant details may put a business at risk of incurring further penalties. For a fast and straightforward process, it’s always advisable to work with HMRC to get the audit sorted as soon as possible.

Many companies prefer to have their accountant or accounting teams kept in the loop so that everyone remains on the same page throughout the investigation. 

What to Expect during an HMRC Audit

If a company has a registered accountant, HMRC may contact them first in advance. Before the audit takes place, HMRC will elaborate on the records they will be looking through and auditing. These will usually be the following records:

• Business accounts 
• Company tax returns 
• Any PAYE records
• VAT records (if VAT registered) 
• Any tax calculations conducted 

A representative of the HMRC may also contact a business owner to ask further questions about the company accounts. This may be done in person, at an accountant’s office, or even at a registered home or business address. While a company has the right to question the reasons for an investigation into their records, all businesses have a legal obligation to give HMRC access to any requested information. 

If HMRC discovers that a business has actually paid too much tax, that business will receive a tax rebate, and if tax has been underpaid, companies will be given 30 days to pay what’s owed with interest. The results of an audit will usually be sent in writing, with a breakdown of the outcomes and next steps. 

While most audits are conducted and closed with relative ease, a business does have the right to appeal the outcome of a tax audit. However, complex audits where large sums of money are involved may lead to a longer investigation with large penalty fees and even potential criminal charges. 

How to Reduce the Potential risks of an HMRC Audit

Unless it’s a random audit, HMRC investigates companies that indicate suspicious activity. But these suspicions can be significantly reduced by implementing the following simple but effective changes. 

Simplified accounting processes

Getting on board with the government’s scheme to make tax fully digital facilitates a more streamlined accounting process that leaves little room for error. The more compliant a company is with Making Tax Digital guidelines, the easier it will be to submit tax returns and keep on top of deadlines. 

Being punctual

The innovations listed above help businesses to remain more punctual with submitting any necessary tax documents or other vital information online. And when a company makes tax payments on time on a regular basis, the number of red flags HMRC will associate that business with reduces. 

Better bookkeeping

Regular and comprehensive checks internally can help to keep a company’s books in order and eliminate the potential for errors and oversights to occur. This helps to keep everything organised and easily accessible. 

How often might HMRC conduct an Audit of a Business?

In general, a routine HMRC audit can happen once every 5 years or so, depending on the industry a business operates in (companies deemed a higher risk due to the industry it exists in may incur more regular audits).  

As stated above, a business can do everything right and still be subject to a random audit, even if there are no inconsistencies or mistakes in the company books. However, a business that maintains clear and concise bookkeeping with the latest government-led taxation initiatives is a business that’s prepared and less likely to be flagged up as a potential problem. 

If a company can stay organised and compliant, the risks of an error can be diminished significantly, while helping to facilitate a much faster and smoother HMRC audit if and when that business is subject to one. 

In time, this organised process will feel like second nature, creating a more cohesive and simplified way of keeping on top of your taxes.