With the government trying to plug a large hole in its finances, HM Revenue & Customs (HMRC) has announced a crackdown on tax evasion. Businesses are more likely to receive a letter, phone call or a visit, and HMRC inspectors will check for both tax evasion and avoidance. With this in mind, it’s essential as a business owner that your financial affairs are in order if inspected by the taxman.

To differentiate from evasion, tax avoidance is a legitimate means of using the rules to reduce the amount of tax you pay, but is typically more of a big-business issue. Small companies are more likely to be targeted for tax evasion, where a business misclassifies an item in their records, or leaves out earnings, and pays reduced or no tax.

There are several circumstances that may trigger an HMRC inspection:

• It could be a random check.
• It might be due to an out-of-place figure on a tax return.
• The company tax payments fluctuate from year to year.
• The business profits were not what HMRC expected for that type of business.

As a business you’re more likely to be targeted if you deal with large quantities of cash transactions, as they need more scrutiny to ensure the proceeds are being accounted for correctly. The general rule to bear in mind is that all companies are likely to be visited at some point, so make sure you have everything in place to give HMRC the right answers when they come knocking.

1.) Reduce the chance of a tax inspection

HMRC cannot inspect every company in the country so they will look out for warning signs that might indicate a tax problem. Therefore, it’s essential that you don’t give them the opportunity by ensuring your records up kept accurately and up to date, which should mean there would be fewer errors in your accounts. Filing your tax returns on time with all the necessary paperwork is a good way of demonstrating to HMRC that you are in control of your administration.

That administration is essential, as you will need to show evidence of what you’ve bought and sold, so it’s crucial that you keep receipts, invoices and bank statements to show what is going in and out of your account. If you identify that an error has been made, bring it to the attention of HMRC, explain how it came about and what you have done to prevent it happening again in the future. You may still be subject to a penalty, but HMRC will look more favourably on it, than if they found it themselves during an inspection.

2.) Prepare for a tax inspection

There is a set procedure if you are selected for an inspection. HMRC will write to you, giving at least seven days’ notice, and tell you which records they will look at and from which periods. They may wish to look at previous years records as well so ensure that your books and computerised records are up-to-date. Make sure the right documents have been filed and are easily accessible online. It’s essential that you cooperate and present the facts to them as they are skilled at what they do and will be able to identify if you are lying or holding back information.

Tax inspections can be daunting and you don’t get them very often so you may never feel comfortable attending them. If you are worried about presenting the information correctly, consider having your accountant present and get them to talk to the inspector on your behalf. If you and your accountant have identified any problems, raise them with the inspector rather than hiding them. Use the visit to ask questions. Following the inspection, you will either be immediately informed of the outcome or contacted by letter afterwards.