Why Do HMRC Want To Audit My Business?

An audit is an investigation carried out by HMRC to ensure a business is tax compliant. It can range from a request for records, to a longer and potentially more disruptive process where investigators go through all your financial information looking for errors or evidence of fraudulent behaviour. Both, and everything in between, can be stressful.

HMRC don’t limit their focus to big businesses, money launderers, or deliberate tax avoiders. Any business, big or small, can be subject to an investigation if they suspect something’s not right in the accounts. Or even if they just fancy doing a spot check.

What might trigger a tax investigation?

HMRC might decide to come and audit your business for all sorts of reasons. We go over some of the most common ones below, but the list isn’t exhaustive.

Submitting returns late

Missing your tax return deadline can be a red flag to HMRC, suggesting you might have issues organising and compiling your financial records. A one-off might not mean an instant investigation, but making a habit of it is likely to draw unwanted attention.

Of course, there are lots of other reasons why you might be late sending a return, so if there’s a genuine reason then it’s well worth contacting HMRC to let them know.

Big changes in income or outgoings

All businesses see fluctuating profits, but some patterns can make HMRC more suspicious than others. For instance, they might ask why your earnings have significantly reduced when similar businesses in your industry report income consistent with previous years.

The key here is a sensible explanation, such as losing a big client or taking some time off, rather than “I decided not to declare all my income this year, because I didn’t fancy paying tax on it”.

Inaccurate expense claims

This catches a lot of people out because there often isn’t a concrete answer for whether something counts as an appropriate expense. It’ll depend on your business. Make sure any expenses you declare to reduce your taxable income are “wholly and exclusively” for the benefit of the business.

If they find anything wrong

If HMRC do find anything wrong with your financial records, you’ll have to pay back any costs owed with interest and perhaps a penalty charge too. If auditors find evidence of deliberate dishonesty and fraudulent activity, this could lead to a criminal investigation and eventually prosecution alongside any financial penalties.

How to avoid or deal with an audit

Keep good records

Excellent financial records reduce the likelihood of an audit, whereas errors or late submissions risk drawing HMRC’s attention. If you are investigated, good record keeping will make the process less of a hassle.

Have proof ready

Investigators will need to see proof of any expenses your business has incurred and wishes to claim for. If this proof isn’t there, it’ll sound alarm bells for them.

The best way to keep hold of receipts and other proof of purchase is to start storing everything digitally. Pandle’s Receipts feature will do the trick. Other software providers are available with similar features, of course. We just like ours best.

Learn more about using Pandle to make business accounting easier. Create an account today and decide what to do with all the extra time you get back.