One of the most stressful aspects of running your own business and having to submit tax returns annually is the dreaded HM Revenue and Customs (HMRC) tax inquiry.
In the career of an independent practitioner, there is a good chance that you will be subject to one, so understanding the key risk factors to reduce the danger of this is important, as these inquiries can be expensive even with a clean bill of financial health.
What is an inquiry?
The income tax system for individuals and the corporation tax system for companies are based around self-assessment. This means that HMRC receives a series of figures only and no supporting paperwork is usually sent.
HMRC does not reveal the exact method of selection for inquiries but one of the first aspects is for their algorithms to look at expenses to see if they look in proportion to other businesses.
Additionally, HMRC is receiving more and more information electronically and therefore already has information on its systems to compare your tax return entries to others. Omission of information already on its systems is usually an automatic inquiry, unless trivial.
The most common type of inquiry is known as an ‘aspect’ inquiry and this type is targeted at one or a small number of aspects of your tax return.
In this type of inquiry, it is normal for the focus to just be on the area raised. A full inquiry is more involved and often requires the taxpayer/business to submit all the source accounting records. It inevitably results in a lot of questions and a substantial bill to deal with the inquiry.
It is important to note that it is very unlikely that the fees paid to deal with your annual tax affairs will cover a subsequent HMRC inquiry on the figures.
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