Few tax returns are investigated by HMRC with the majority being accepted as honest and accurate. When HMRC investigate the tax return of a small business the inadequacies of the accounting, lack of knowledge by the enquired and professionalism by the tax inspector often results in a higher tax bill.
A solid system of bookkeeping accounts provides the basis to defend any tax investigation. When the tax enquiry questions can be answered quickly and effectively from existing third party documentary evidence the tax inspector will gaiun confidence that that search is less likely to reveal a higher tax bill.
Despite the best intentions of a small business the tax enquiry that small business faces is undoubtedly an investigation between a businessman naïve in the thousands of statutes and taxation regulations against a professional tax inspector trained and experienced in where to find the loopholes. The match is akin to a junior football team taking on a team of professionals.
The difficulty most small business has to deal with is apparently innocent questions from the tax inspector the answers to which cost the tax payer money. The tax inspector may ask numerous questions to which the tax payer does not necessarily have to answer or agree to. The solution is always to stick to the solid bookkeeping facts as shown in the accounting records.
Under UK law there is no regulation stating that a tax payer has to attend a meeting with the tax inspector. Meetings with tax inspectors can result in many questions being asked which increase the tax liability from lack of knowledge of the tax rules and sheer frustration by the small business to get the job done and over with. Tax meetings with offical bodies such as the tax authority are often best conducted by felloow tax professionals acting on behalf of the small business.
If the small business accepts a meeting with the tax inspector it is important to prepare for the meeting correctly. Such preparation would involve reviewing all bookkeeping records prior to the meeting and arranging them in a reasonable order, double checking the accounts do not contain any obvious errors and also obtaining from the tax inspector prior to the meeting a detailed note of all areas to be discussed.
The tax inspector will often suggest a meeting at the business premises or the tax payer home. The tax inspector does not have a statutory right to enter the business premises and can do so only by invitation or warrant. The legislation regarding visits to business premises is to be changed from 2009.
Tax inspectors are observant and on visiting the premises will assimilate many areas to be investigated by simply looking around or idle chat with members of staff. When a tax inspector is invited to the home the general lifestyle of the tax payer would be assessed in relation to the profits declared.
There are many examples of how a tax inspection can determine the validity of the accounting records. This list is almost endless.