What Business Owners Need to Know About a Tax Audit?

Yannick Agbohoun

Yannick Agbohoun

Accounting manager

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Operating a business or being a director/partner may lead to a tax audit by HMRC to verify tax compliance. Though daunting and stressful, proper preparation can help manage and gain insights from the process. This article offers an overview of tax audits, their components, potential triggers, and how to handle them for your business.


What is a tax audit?


A tax audit is a situation where a government tax agency such as His Majesty’s Revenue and Customs (HMRC) or the Internal Revenue Service (IRS) contacts a business or individual taxpayers and requests to view their financial records. The main reason for a tax audit is that there is the belief that the business in question may not be filing its tax returns correctly or that the incorrect amount of tax is being paid. A tax audit is a serious matter and should be prepared for and dealt with appropriately. 


What might cause a tax audit to be conducted?


The majority of tax audits are initiated because HMRC believes that there is an issue with the amount of tax a business or a taxpayer is paying or the amounts that have been claimed as a rebate. It must be noted, however, that at least 7% of tax audits are conducted at random. Many people believe that some business sectors are under more scrutiny than others and while this may be the case, it is prudent to always be prepared for a tax audit of your business. As a general rule, a business owner should expect a routine tax audit once every five years. 


A tax audit can be caused by a number of factors, including:

  • Late tax returns being filed
  • Errors in your tax returns
  • Inconsistences or large variations between tax returns, such as dramatic increases in costs or a loss of income
  • Abnormally high costs for a business in your sector
  • The tax returns are not consistent with your standard of living or how busy your business is
  • If you hold offshore bank accounts
  • If you have received income from property
  • If you work in a high-risk industry that deals with cash payments or that is routinely targeted by HMRC, such as the building industry
  • Someone has advised HMRC that they should look into your tax affairs


What is involved in a tax audit?


During what is known as a full tax audit, representatives from HMRC may request to visit your place of residence, your business premises or the office of an advisor. They may also request that you visit their offices. If HMRC does send you a request notice, you must comply or face the possibility of a financial penalty being imposed. 


In most cases, HMRC will request all your finical statements for analysis and take them away with them. They will usually require the documents for an entire financial year. However, if HMRC suspects intentional fraudulent behaviour, then they can request up to five years of financial records.


If HMRC discovers evidence of tax fraud that they believe was intentional and has been deliberately concealed from them, then they can impose fines up to 100% of the amount of tax that should have been paid. If the error was the result of a lack of reasonable care, the penalty can be up to 30% of the tax due. For a deliberate error that was not concealed, the penalty can be up to 70% of the total tax due. 


Once HMRC has completed the tax audit, you will be notified of the results. This can take several weeks or even months depending on the complexity of the business’s financial records. HMRC will advise you if you have overpaid, in which case you may receive a refund with interest. They may ask you to pay additional tax, in which case you will have thirty days in which to make the payment. 


When deciding upon what penalty to impose, HMRC will take into account the reasons why the error occurred, whether or not they were informed of the error, and how much assistance you have provided during the audit.


How you are notified of a tax audit


The notice of the request to audit your tax records will be sent via the post from HMRC. The letter will detail why they are conducting the tax audit and what aspects of your tax affairs they are investigating. A tax audit must be conducted within twelve months of the due date of the tax return that it is querying or up to twelve months after the return was filed if it was filed late. 


You can request for the tax audit to be halted provided you have a reasonable excuse. A tax audit can be halted if you can prove you are seriously ill or if a person close to you recently passed away. 


How to deal with a tax audit


A tax audit is a serious undertaking. As soon as you are notified that HMRC wishes to conduct a tax audit you should seek professional advice. It is advisable to have a business accountant perform a thorough examination of all your tax records and your financial statements. An external audit will ascertain if your information is correct and current. This will help the tax audit to go smoother and take less time. 


Your accountant will also be able to advise you on how to prepare your documentation and how to respond to requests for information. It is advisable to provide as much information in writing as possible and ask that all requests be put in writing. 


Never lie to representatives from HMRC or destroy any documentation or information that they request. Doing so can lead to severe penalties, including significant fines and even prison time.


Make sure you comply with all requests from HMRC promptly. If you have uncovered an error in your tax reporting, be sure to inform HMRC right away. Do not act to obstruct the audit proceedings. Your co-operation can lead to smaller penalties being imposed. 


If you feel as though the information requested is not pertinent or the representatives of HMRC are acting in an unfair or unprofessional manner, then it is best to advise HMRC in writing. Your accountant can also advise you if any requests for information or auditing procedures are unwarranted or excessive. 


The best way to ensure you are prepared for a tax audit is to have all your financial statements and your tax records in good order. Mooncard can help you to make sure you have an organised and accessible record of all purchases made on behalf of your business.


The Mooncard payment system generates an automatic expense report every time a purchase is made by your business and a receipt photo is uploaded to your Mooncard account. This report is sent to your accounting department immediately. You will never have to worry about lost expense reports or wonder where outgoing cash went again! 


To arrange a free, no-obligation online demonstration of the Mooncard payment card solution, just visit the Mooncard website. The Mooncard system will streamline your accounting procedures and could prove to be an invaluable asset for your business if you have to undergo a tax audit. 

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Yannick Agbohoun

Yannick Agbohoun

Currently Accounting Manager at Mooncard, Yannick Agbohoun was one of the company's first employees. He has extensive expertise in managing complex accounting and financial challenges.