In the United Kingdom a tax investigation is essentially the examination by HM Revenue & Customs (HMRC) of a person or organization’s tax return. Tax investigations are used as a tool by tax authorities to detect and deter tax evasion and avoidance. HMRC generally applies the tax code in such a way that any gray areas are easily spotted and resolved. This in turn improves the overall efficiency of the tax system. Unfortunately many individuals try to game the system and avoid detection through extremely complicated strategies and techniques.
Individuals who think they will be subjected to a tax investigation will typically hire a tax specialist or accountant. These people are highly trained and experienced in preparing and reviewing income tax returns. They can analyze virtually any aspect of your financial life and determine the appropriate tax relief. If you are under scrutiny for any reason they will be able to advise you on how best to deal with the examination. Their advice may prove to be invaluable, so make sure you choose well.
Generally speaking most taxpayers will not be required to deal with their own tax investigation. An Inspector from HM Revenue & Customs (HMRC), will send you a notice to inform you that they intend to make an inspection of your tax return. The inspector will ask you for information about your tax return, which will include bank statements, pay slips, sales, purchase and other income. You will normally be asked for verification of the facts that have been furnished, including all documentary evidence. It is important to remember that you have the right to use the services of an accountant or tax Lawyer to represent you during a tax investigation and that if you choose to answer questions directly yourself in respect of the matter being investigated, then it is essential that you do so with care without making admissions you may later regret.
When a tax investigation is initiated, it is usual for the taxpayer to provide documentation that will help the inspector to establish whether he or she has made any wrong-doings. These can be as simple as showing that they did not miss a payment, but can also include bank statements that show large amounts of expenditure. It may be natural to feel anxious and scared at the very idea of a tax investigation, and you should try to stay calm and collected no matter how upset or embarrassed you may be. In many cases an investigation will simply be a summary of what HMRC has noticed, rather than a full-blown investigation.
The main aim of a tax investigation isn’t so much to highlight any errors or dishonest ways you have dealt with your taxes, but to ensure that the system itself is working correctly. Taxpayers’ accounts and records are investigated so that corrections can be made to ensure that the tax returns are filed correctly and completely. This is to make sure that the system of filing taxes is not biased in any way. Tax inspectors are trained to look for anomalies in the way the system functions and to identify methods that might be used to game the system.
Organizing documents used to prepare your tax returns annually is a fantastic way to develop proper accounting before an investigation. However, if you have actually not arranged your records as you filed your yearly tax returns, now is the moment to organize them for the investigation. Make sure that the person carrying out the investigation has access to all records used to prepare the tax returns.
For the investigation to go efficiently, these documents must be arranged in a sensible fashion. In addition to making an investigation fast and painless, this way of doing things will certainly give you credibility with the tax inspector, thus making the inspector give you the benefit of doubt if a little discrepancy does emerge during the investigation.
Your investigation notification should tell you what documents the tax inspector wishes to see during the investigation. Normally, tax inspectors might wish to see bank statements, cheque stubs, sales invoices, invoices for expenses, and purchase or lease of assets. If yours is a small business, you are not obliged to preserve a formal collection of financial records such as nominal ledgers and day books. However, the tax inspector might ask to see any kind of accounting records you do have, and see your bookkeeping system during the process of the tax investigation.
If your bookkeeping operation is carried out with a computer system, you will need to provide the inspector with a hard copy of your financial records. If you do maintain manual accounting system, the tax inspector is entitled to ask to see them and you should make them available to the inspector. Additionally, you should provide any available financial statements to the inspector in order to help the inspector understand your bookkeeping system.
If you don’t know what accounting records you need in order to prepare for your tax investigation, you will need to find an accountant that deals with tax investigation to help you out with the investigation.
