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How SMEs should prepare for and handle tax investigations

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How SMEs should prepare for and handle tax investigations

Between the 2020/21 and 2022/23 tax years, there was a 21 per cent rise in tax investigations into SMEs, highlighting the fact that HM Revenue & Customs (HMRC) has ramped up its interest in this area.

With this in mind, compliance has never been more important.

Tax investigations can be a daunting prospect for any small or medium-sized enterprise (SME). Whether it is a random check or triggered by discrepancies in your filings, these investigations need to be handled with care and preparation.

Understanding the triggers for a tax investigation

Firstly, it’s important to understand why tax investigations occur. They can be random but are often triggered by inconsistencies or anomalies in tax returns or financial statements.

Common triggers include significant changes in income or expenses, late filings, or discrepancies between your accounts and tax returns.

Preparing for a tax investigation

Ensure all your financial records are accurate and up to date. This includes invoices, receipts, bank statements, and payroll records. Good record-keeping not only helps in an investigation but can also prevent one.

Familiarise yourself with the tax laws relevant to your business. Understanding your obligations can help you identify any potential issues in your tax filings.

Before an investigation, review your tax returns for the years in question. Look for any potential areas of concern and be prepared to explain them.

Handling a tax investigation

If HMRC contacts you regarding a tax investigation, respond promptly. Delaying or ignoring communication can escalate the situation.

HMRC will specify what information they need. Provide this in a timely and organised manner. If you’re unsure about what’s required, ask for clarification.

As an owner of an SME, you should also make sure you provide complete and accurate information. If there are errors in tax filings, it is better to be upfront about them.

Document all communications with HMRC, including phone calls, emails, and meetings. This record can be useful if there are any disputes or misunderstandings.

If HMRC finds discrepancies, you may be able to negotiate on penalties or payment plans.

Regardless of the outcome, use the investigation as a learning experience to improve your future tax compliance and record-keeping.

Tax investigations can be stressful, but with proper preparation and a calm, organised approach, SMEs can navigate them successfully.

Remember, maintaining accurate records, understanding your tax obligations, and seeking professional advice are key to handling these investigations effectively.

Our expert team of tax advisors can you help you prepare and handle a tax investigation. If you would like more information about our services, please contact us today.






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