A brief guide to what happens if you're subject to an investigation by HM Revenue & Customs, and how to make the process smoother.
Submitting your self-assessment as a sole trader can be daunting, arduous, stressful - or more likely, all of the above. Ask any freelancer at any stage of their career, and you'll likely hear a distinctive groan at the mere mention of the process.
No matter how many times you've completed a self-assessment, paid your income tax and your NI contributions; no matter how many times you've read and re-read you’re accounts summary; and no matter how competent you’re accountant, it is possible that things still fall through the cracks.
When that happens, you might be subject to an investigation by HM Revenue & Customs.
It sounds intimidating, perhaps even unnecessary for a freelancer to be audited, but it's one that you can easily prepare for - whether you're facing investigation or not.
We hate to say it, but ticking all the boxes might not be enough. The fact of the matter is, there's quite a few reasons you might find yourself in a tax investigation, and they're not all to do with obvious mistakes, or deliberate omissions.
Here's why HMRC might want to look into your books:
There's nothing concrete to suggest that consistently late self-assessments will incur an investigation (though they will incur a fine), but it is possible that a late submission alongside one of the above could play a role.
As a sole trader, you aren't obliged to hire an accountant to complete your self-assessment for you - though we'd encourage it for more reasons than one! But there are indications that having an accountant manage it for you will reduce the likelihood of an investigation. And mistakes.
While some self-employed professionals are subject to a 'full' investigation by HMRC, it's not always a given.
A quick breakdown:
What it sounds like on the tin. This is typically when HMRC has suspicions about the accuracy of the information you've provided, either intentional or otherwise, such as underreporting income. They may ask for a full breadth of your business records, personal records, and multiple meetings to determine whether something has gone awry.
This is typically if HMRC believes you have made a genuine error on one or two aspects of your business finances, rather than intentionally misleading and misrepresenting your records. They'll likely request information about the individual errors, and may not look into your personal finances unless they absolutely must do so.
As a rule of thumb, HMRC investigates only a handful of sole traders each year, and more often than not, these are individuals who have intentionally concealed information, or made some other step towards tax fraud.
It's important to note that it is still possible to be randomly selected, and you shouldn't feel concerned or surprised if you believe this is why you're being investigated.
It may sound obvious, but it's worth putting it in writing: cooperating swiftly and fully is the quickest way of ensuring HMRC can conclude its investigation, and you can continue on with your life.
HMRC will make it clear what information they need from you, and you can lean on your accountant to ensure everything is in order.
Information might include:
This places the emphasis on you to keep your records well-organised, and stay on top of your business' admin, even if you do have an accountant to support with the paperwork.
Remember to look closely at the date stamps HMRC has requested, and send full, clear copies of materials, making sure none of the bank details or your details are cut off, blurry or otherwise unreadable.
HMRC will send you a letter once they conclude their investigations, just as they do when they start them. This will have any next steps you need to take, and dates you will need to do them by.
Generally speaking, there's only two end results: HMRC has either found an error in your accounts, or it hasn't.
If it's the former, your letter will simply reiterate that, and there's no further action from you needed. If it's the latter, and HMRC has found there to be issues with your finances, whether that's an honest mistake or otherwise, you will need to address this.
Likelihood is you will be fined for this error, and will be required to pay any outstanding tax. Once that has been done, the case will close. Of course, in the event of serious issues with your business finances, you might be presented with a fraud charge and face prosecution. But, that is in extreme cases only.
The financial responsibility that comes with freelancing - or being any other type of business owner - can be overwhelming. Which makes it even more important to keep your finances well-organised.
Safenetpay's business current accounts can help you do just that, and our team is always on board to offer you the support you need - whether you're just starting out, or your business has hit a new milestone.