HMRC enquiries can be time-consuming and stressful. We shall consider why they happen and what steps you can take to reduce your chances of being selected.
Why Have I Been Selected?
It could be as simple as HMRC randomly selecting your tax return, or it could be as a result of:
- Errors, inconsistencies, misunderstandings or information missing from your tax return.
- Third party information received. HMRC is provided with vast amounts of information from financial institutions both in the UK and overseas (i.e., banks, letting agents, fund managers, Land Registry etc.), or it could be from a disgruntled ex-spouse, employee or business partner.
What Can I Do to Reduce my Chances of an Enquiry?
It is not possible to completely avoid the chance of being selected for enquiry as HMRC will randomly select tax returns and accounts, and it could be that they receive third party information that is incorrect.
However, we will set out the prevention is better than cure approach which you can use:
- Keep a tax file for each tax year and save all your relevant information in it. Keep a note of your tax events during the year, i.e., have you started a new job with benefits in kind, commenced self-employment, opened a new savings account, bought an investment property, sold some shares or a property, started contributing into a pension plan, subscribed to EIS shares, made a charitable donation under gift aid etc? It should be easier to do this as you go along, it is harder to try and remember everything in late January!
- It’s not uncommon to leave your tax return until the last minute; this is not a good idea for several reasons, such as you may be missing information, there could be queries or cashflow issues, or there may not be enough time to resolve these.
- File your tax return and pay your tax on time (i.e., by 31 January). The tax calculation is complicated and if you submit your tax return by 31 October, HMRC will calculate the tax for you based on the tax return entries.
- If you prepare your own tax return or provide your accountant with a schedule of information, step back and double check what you have prepared. It is incredibly easy to put the decimal point in the wrong place, transpose figures or miss a source all together. The second check can prevent silly errors and omissions, and a potential enquiry!
- Your tax return is the tip of the iceberg as HMRC will only see a few entries in your tax return whereas the underlying information is likely to be more extensive. If you are self-employed or letting a property:
- Have you separated your business and personal expenditure, and only claimed relief for the business costs?
- If you are using an estimate, or making a judgement, be reasonable with your apportionments.
- If you have refurbished a rental property, have you only claimed relief for the repairs and maintenance costs? The costs of enhancing a property are not allowable against Income Tax (though they can be deductible against CGT when you sell the property).
- Are your expenses particularly high, or income lower than usual? There is no hard and fast rule as to what income to expenses ratio is acceptable, but HMRC’s software will pick up changes year on year. There may well be a perfectly reasonable explanation and make use of the notes section of the tax return to explain.
- Double check and get it right the first time round. There are perfectly valid reasons for amending a return, but amended returns are more likely to be selected for an enquiry.
If your tax affairs are complicated or you are unsure, then seek professional advice. There are no guarantees, however, tax returns prepared by a reputable firm of accountants are less likely to contain errors, omissions, unexplained items etc. and therefore less likely to get selected for enquiry.
What next?
If you need any assistance with completing your tax return, or any tax related question, please contact the Gravita Tax Team, who will be happy to help you.
