HMRC Tax Inspections

HMRC tax inspections can be a cause of stress for many. However, for the most part HMRC tax inspections are pretty straight forward and if you are aware of how most HMRC tax inspections work, you can sidestep many of the hurtles that can cause problems. Here are some tips for dealing with PAYE and NI inspections..
The Frequency of an HMRC Inspection

An HMRC inspection is not a yearly event, in fact on average, an individual or corporation can expect an inspection once every 6 years. In many cases, an inspection can lapse between 10 to 15 years, however if you or your company have had past difficulties resulting in errors, an inspection can occur as frequently as once every 3 years.
Grounds for an HMRC Inspection

Generally speaking there are a few red flags that can be a motivational force in having your company inspected, they include:

* Your company was randomly chosen for an inspection
* Your company submitted your P11D or P35 forms behind schedule
* Errors were found on forms which were submitted
* Businesses that are similar to yours have had errors found in the past

Notice of a Tax Inspection

Most companies will learn of an HMRC inspection via phone call. In many cases, an inspector will request a formal meeting with you to be held at your company’s legal trading address and will request that you are present. However, in many cases, an inspector can accommodate a meeting either at your accountant’s office or your tax adviser’s office. Many experts familiar with an HMRC inspection state that the most advantageous meeting point is at your accountant’s office. It is therefore advisable to push for a meeting at this specific location.

It should be noted that due to the nature of an HMRC inspection you should always have professional representation with you at all times during the inspection.
Receiving Expert Help with Your PAYE/NI Inspection

Usually, your accountant can be an advantageous resource to you and will generally be aware of exactly what the Inspector is looking for and avoid common mistakes such as off the cuff remarks regarding certain contractual arrangements during your meetings. Sometimes off the cuff remarks can give the Inspector suspicion to do a deeper, more thorough investigation.

For the most part, a professional account will usually be an added expense, but well worth the price. Generally speaking, the cost of this service is not cheap, however a company or individual that has professional representation can find itself sidestepping the many pitfalls around.
Setting Up a Meeting with the Inspector

Once you have agreed on a date and location to meet with the Inspector, a confirmation letter will be sent. In this confirmation letter you will usually find that there is a request to review specific records. The records that are most commonly reviewed are:

* Payroll records
* Expense claims
* Cashbook and petty cashbook
* Contracts (usually only if IR35 and a 660 review is to be conducted)
* IR35 and Section 660 Preparation

A Note About IR35 and Section 660:

If the Inspector requests copies of contracts, they will more than likely be conducting a full IR35 review. It is important to talk to your account, as well as your professional tax advisor. You should consider making arguments against an IR35 review, especially if you have been operating your company outside that basis. In addition, if either an IR35 or Section 600 issue comes into play, seriously consider specific and expert representation in this matter.
The Inspection Visit

Documenting inspection visits is important. After each visit you should provide a summary of their findings and it is advisable that you send a full report to the Inspector within 20 days of the visit. Summaries can include what has been examined, the extent of the work, the findings, recommendations and conclusions. It should be noted that it is a good idea to send a copy of recommendations even if there is no errors present.
Once an Inspection has Been Completed

Once an inspection has been completed the Inspector will explain what was wrong (if anything) and instruct you on how to satisfy the issue. In the case of significant inaccuracies, another visit might be in order. If your paperwork and presentation was in order and there was nothing found out of order, the Inspector will tell you that the enquiries are finished and complete.
If an Issue or Inaccuracy is Found to be wrong

If inaccuracies are found, the Inspector will usually tell you immediately. If it is found that you or your company owes back taxes an agreement will try to be reached during the visit. In many cases you can start payment immediately, even if an exact figure is not set (in order to avoid interest on any unpaid taxes. In addition, it should be noted that you are entitled to a formal explanation of the figures that the Inspector has calculated and also have the opportunity to dispute any findings, as well as have the opportunity to be professionally represented doing so.
Assessments and Appeals

If an exact figure can not be agreed upon or if there is not enough information available, the Inspector will make an assessment. If you do not agree with this assessment, you will have 30 days to appeal. An appeal can be requested by the Commissioners at any time during negotiations and have the right to supply the Commissioners with the figures you believe are correct. The Commissioners will then make a judgment based on both the figures and evidence presented to them.
Paying Interest and Penalties

It should be noted that HMRC can and will seek any penalties and interest if you fail to account for any tax, failed to make appropriate tax returns or have claimed excessive tax repayments. It should be noted that when a penalty is being calculated, the extent of the information, how helpful you were with the process and the seriousness of the issues are all taken into account.

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Source: http://www.contractorcalculator.co.uk/hmrc_tax_inspections_explained.aspx