How often does HMRC check tax returns?

Just like when we were all children, sometimes the homework gets double-checked!

Regardless of how large or small your business is, there is always a possibility that HM Revenue & Customs (HMRC) may decide to check your tax return, too, writes Christian Hickmott, managing director of Integro Accounting.

Th taxman checking your self-assessment form can happen to anyone, and in this article we will detail why HMRC may take a deep dive into your numerical ‘homework’ and try to answer the question, ‘How often does HMRC check tax returns?’ 

Why does HMRC run checks?

When opening an investigation, or ‘compliance check’, as it is more commonly referred to, HMRC are looking for:

• undeclared income;
• fictitious or inflated expenses; or/and;
• tax evasion -- whether knowingly or unknowingly from the individual or business in question.

So a quick answer to the question of ‘how often does HMRC checks tax returns?’ is probably, ‘whenever it has the resources and capacity to detect the above three.’

To contractors with concerns, we’d say this -- there may be instances of relevant information being omitted from your self-assessment personal tax return (PTR) because, at the time of completion, it may not have been deemed relevant.

Where does your accountant come in?

If you’re unsure or don’t know, ask. It’s vital to be aware of exactly what needs to be included, especially when looking after your own taxes and submitting your own PTR.

Whether you are doing your own PTR or using an accountant, remember the importance of having and giving your accountant everything, they need to complete the form accurately. That is; all details of all your income.

Forgetting to tell your accountant that you now own a rental property, or have started additionally earning from an ‘side hustle,’ would mean they haven’t got the full picture. And not giving your accountant the full picture can result in your tax liabilities being mis-stated. If you’re unsure if it’s relevant, tell your adviser anyway.

What can prompt a tax investigation or HMRC-check?

There are some industries which HMRC has its eye on a little more.

That said, any individual who submits a PTR can be investigated, particularly those who are self-employed.

The very nature of self-employment can mean varied earnings changing from year-to-year, and where there are dramatic differences, HMRC may like to understand why, regardless of how genuine those differences, like sudden growth, might be.

HMRC tax inquiry triggers (includes after a campaign)

Other factors known to prompt a HMRC-check into you or your business, include:

• Late filings
• Errors in your PTR
• Unusually high costs
• Offshore bank account usage
• Involvement in tax avoidance schemes.

If you’ve come under scrutiny from HMRC and you’re not sure why, it could be that you’ve largely been dealing with cash transactions, or even that HMRC has received a tip-off from a third-party. Such tip-offs to HMRC of suspected tax evasion can follow campaigns for its whistle-blowing-type services and hotlines which the Revenue runs.

What happens in an HMRC investigation?

When starting their checks, HMRC will send a letter to the individual as well as their accountant (where applicable), to let them know the investigation will be taking place. The tax office may look to gather further information on the normal details, such as bank statements, sales invoices, and purchase invoices. The HMRC letter will state a deadline of when to provide it.

Can contractors avoid an HMRC enquiry into tax returns?

The reality is, there isn’t much you can do to avoid the Revenue looking into your affairs!

We advise all clients that if you have been truthful and fully transparent in the details declared to HMRC, you have nothing to worry about.

In practice, that means always ensuring you feel completely confident that you have submitted the correct returns and paid the right amount of tax.

While completing your own personal tax return yourself will of course save you money, using the services of a qualified accountant will ensure all bases are covered, calculations are correct, and it’s submitted on time. If those three don’t come to pass, you may have comeback versus if you did it totally on your own.

What HMRC penalties could I potentially incur?

If, after an investigation or assessment, you have been found to have understated your tax liabilities, it is very likely that you will also be issued with a penalty by HMRC.

The penalty will be a percentage of the additional tax that is due. To calculate the percentage, HMRC will assess your behaviour and the reasons for the errors, before applying to their standard structure. For example, someone who deliberately suppressed tax liabilities can be given a penalty of up to 100% of the tax due. Whereas someone who was just “careless” will receive a penalty of 30% (maximum). This percentage is on top of any interest added to the late payment of tax, however.

So…how often does HMRC check tax returns?

The tax office’s timetable for probing taxpayers isn’t publicly disclosed unfortunately, and for good reason if you think about it! What we do know is that many of HMRC’s checks are done at random. And the department looks to do several random checks a year – so it’s always good to be prepared.

In addition, be aware HMRC can launch a basic enquiry up to one year after the normal filing date of January 31st. However, tax officers can go back up to six years for careless errors and go back 20 years for deliberate errors.

Almost needless to say, it helps massively to have an accountant in your corner if the worst does happen and an inspector calls. Finally though, when choosing to work with an accountant to submit your tax returns, take steps to understand your own responsibilities as a taxpayer, as this can maximise the relationship which in turn can pay dividends later on.