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Tax Inspection And How To Avoid Them

“Anybody running a business needs to be concerned,” says Nicholas Parkes, an ex-tax inspector turned tax information provider. “In the Revenue, we always believed you could pick up any file and find something.”

What triggers a tax inspection?

According to Parkes, some 7% of tax inspections are triggered at random — “so HMRC can check that they are targeting their inspections properly and also so that nobody feels safe”. The vast majority, though, happen when HMRC believes there’s something wrong.

So in theory, small businesses that keep good records and declare everything should have nothing to fear. However, when it comes to mistakes, ignorance is no defence, so firms have to take every care when completing their returns and ensure that they are on time — in other words, don’t give HMRC any cause for concern. Any unusual fluctuations can raise alarm bells for HMRC. Specific queries like these can trigger what’s called an aspect enquiry — as opposed to a full-blown investigation

Good records, tidy accounts and clear tax returns

What’s more, all businesses are now required to file returns online. That means HMRC can use its own software to analyse returns and compare them to sector averages. So what else can trigger an investigation? “Some types of business get more attention, such as cash-based businesses and industries like building,. “It also depends on your accountant’s credibility rating. If your accountant is diligent and identifies problem areas clearly, it helps.” What every business should do is to use the extra space on their tax return form to explain any unusual fluctuations in turnover or profit. If you haven’t left anything out, you should have nothing to worry about.”

 What happens in a tax inspection?

So what will happen if your business is inspected? “In a full inspection, they will take all the records away and come back with questions,” says Storvik. “They can raise penalties of up to 100% of the tax that should have been paid. But for a small firm, the inconvenience and worry that an inspection causes can be significant.

 Three steps you can take to reduce your chances of being inspected:

  1. Always submit your tax returns on time.
  2. Make sure your returns are accurate and complete.
  3. Explain any changes from one year to the next. Big changes in turnover or gross profit rates will ring alarm bells, especially when drawings taken from the business or remuneration paid seem to be insufficient.

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103 Cranbrook Road,

Ilford, Essex

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