Company Tax Investigations By HMRC

Gary Green
Gary Green
May 16, 2024

If HMRC decides to carry out an investigation into a company’s tax returns, it is important for those running the business to be well-prepared. Typically, a tax investigation into a company will be divided into full enquiries and aspect enquiries, although in legal terms there is no difference between these two categories. In broad terms, aspect enquiries involve cases during which HMRC is enquiring about specific entries on the business’s corporation tax return. A full enquiry, on the other hand, looks at all aspects of the company’s tax return.

Aspect And Full Enquiries

Usually, an aspect enquiry will be simpler to manage since HMRC is only expressing an interest in a specific element of the company’s accounts or tax return.

If HMRC has decided that a full tax investigation of a company’s tax return is necessary then typically they will require sight of all of the business’s records and books. That includes all financial accounts that have been prepared by either the company itself or the company’s accountant. These records will then be examined in detail by HMRC in order to determine whether all of the expenses and income have been claimed and reported correctly.

Company Directors And Company Tax Investigations

Usually, HMRC requests a meeting with the company’s directors in person in order to obtain a better understanding of how the company operates. Ideally any meeting should be held without company directors present, but if they must attend, then it is highly recommended that they never attend without professional representation.

Typically when company tax investigations are carried out by HMRC, the company directors’ personal tax affairs are also often reviewed. This is especially likely to be the case if the business is run by a family or has only a few directors. Tax Inspectors will typically try to gain information about personal taxes by either asking questions regarding the directors’ personal tax affairs during a meeting or by requesting personal financial data like bank account statements. Sometimes, this approach can be justified, however HMRC frequently makes requests that they have no legal power to enforce. In many cases, directors do not have to legally submit to such a request from HMRC. Investigating the tax affairs of a business does not give HMRC automatic powers to compel a director of the company to submit to their requests. It is therefore imperative to take professional advice about which documents must be supplied to HMRC and which should not.

Can HMRC Carry Out An Investigation Into A Closed Company?

There is a common misconception that if a company is dissolved and no longer on Companies House’s register, it no longer has liability for debt and tax demands. Unfortunately, this is not the case. Therefore, if HMRC has cause to believe that the tax affairs of the closed company are not entirely in order, they can restore the company to the register so they can carry out an investigation.

HMRC may investigate a historical case of tax underpayment or evasion for several reasons. This is called a “back duty enquiry”. Typically HMRC will not do this unless the amount of money involved is significant or if an investigation is ongoing into the directors’ tax affairs and those of the companies that they have subsequently gone on to work with.

HMRC can launch an enquiry into a dissolved company but time limits apply. If the personal tax and accounts were filed in the appropriate time limit, then HMRC has a maximum of 6 years once the tax year in question has come to an end to issue their “discovery assessment”. It is for that reason that it is crucial to maintain personal and corporate tax records for at least six years following the closure of a company. This only applies in cases where carelessness is suspected, however, In allegations of negligence or fraud, investigations may be launched as long as twenty years following the company being closed.

Can Tax Investigation Specialists Help?

Although it is true to say that HMRC has a number of powers available to them that will help them to carry out tax investigations into companies, it is important to recognise that their powers do have limits. This is where help from a tax investigation specialist can prove to be vital.

Tax investigation specialists will be able to discuss with both parties any discrepancies that are apparent between the records and accounts in an attempt to reach an agreement. In cases where discrepancies exist, they can endeavour to ensure that the company’s tax liability is minimised. All discrepancies will be sought to be quantified, and an agreement will be reached on the amount of revised profits that should be subjected to Corporation Tax. In cases where identical errors appeared in earlier tax years, it is possible that HMRC may attempt to implement adjustments for those years too, going back for a minimum of four years, with the possibility of going back as far as twenty years in certain circumstances. Should the company’s income have been diverted personally to its directors, it is likely that HMRC will seek a personal tax investigation settlement with those directors. While HMRC’s main concern when carrying out a tax investigation into a company will always be Corporation Tax, it is often the case that HMRC uses the opportunity to scrutinise other taxes that are relevant to the organisation such as the company’s PAYE and VAT operations in order to determine whether any irregularities exist.

A practice that specialises in tax investigations will have an in-depth understanding of the powers available to HMRC and their limits. They will, therefore, be aware of when it can be deemed appropriate to question how the investigation is being conducted by HMRC. For example, during company tax investigations, tax investigation specialists will not permit the extension of the investigation by HMRC into the director’s personal tax affairs unless an excellent reason to do so has been established in advance. It therefore makes sense to seek out professional advice and assistance in such matters.

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