Surviving Audits With Confidence: Expert Tips For A Smooth Process

Tax audits… that one phrase that all business owners dread. Audits by the HMRC are a routine part of the tax process, and a selection (usually less than 1%) of businesses are audited annually. Although your first instinct may be to panic, remaining calm is essential. If you have a good handle on your accounts then it is very unlikely they will find anything that needs querying anyway. With the right knowledge and preparation, you can confidently get through the audit process with a minimal negative impact on your business.

In this article, we will be explaining everything you need to know about an audit, and some practical tips to help prepare you for the process, maximising your chances for a positive outcome.

What Causes Businesses To Get Audited?

If you have been chosen for an audit it can feel like your business is under threat, but this is far from the truth. An audit doesn’t mean that the HMRC has detected criminal activity regarding your finances. It is simply a process by which your accounts are examined, usually just to confirm accuracy. The HMRC also conducts random audits, so being selected doesn’t necessarily mean you have done anything wrong.

There are a few things that could put your business at a higher risk of being audited in the first place:

1. Discrepancies in your tax return e.g. your figures not aligning with data from other sources, including employers
2. Engaging in certain activities/industrials that HMRC believes are more prone to non-compliance – usually a more cash-intensive business
3. Statistical factors – if your tax return is substantially different compared to industry benchmarks.
4. Suddenly making a large VAT claim
5. Frequently filing your tax returns late

What To Expect From An Audit

If your business needs to be audited, you will receive a formal notification from HMRC in the form of a letter. This will outline exactly what they intend to audit, as well as provide you with information on the next stages. The sooner you can reply to their instructions the better, as this helps to show you have nothing to hide (and also reduces the risk of you receiving penalties).

There are 3 main types of audit:

1. Full inquiry – this is where HMRC reviews all of your business records and potentially the accounts of directors too.
2. Aspect inquiry – this focuses on parts of your accounts and is often a result of HMRC finding a small issue with your accounts.
3. Random check – this isn’t triggered by HMRC at all, they are at liberty to review your accounts randomly.

Throughout the audit process, you will be asked specific questions regarding your accounts and you will have to review certain documents too. If any questions arise that require clarification, you may be asked to provide supporting evidence. The main objective of an audit is to ensure the accuracy of your tax return, not to trip you up and find loopholes in your accounts.

Some of the key areas an audit will focus on are:

• Accuracy of your income (including self-employment income)
• Deductions and credits
• Business expenses and claims
• Tax withholding and payments
• Unreported income

Upon completion of an audit, HMRC will present its findings, which usually results in one of three outcomes:

• No changes to your tax return
• A tax rebate if you have been found to have overpaid your tax
• More complex audits may lead to larger penalties or ongoing investigations

Once a decision notice has been issued, or a contract settlement agreed, then the audit process will be finished. A contract settlement is a legally binding document between HMRC and the taxpayer, whereby the taxpayer agrees to pay what is owed.

Preparing For A HMRC Audit

When you receive your audit notice, the two things you should do immediately are:

Take the audit seriously

Even if you think you haven’t done anything wrong, a HMRC audit is not something you can ignore. Pay particular attention to any deadlines they give you, and take the time to organise your financial documents by the year and type of income. This audit is no one’s responsibility but your own.

Get representation

Muddling through a tax audit is out of the question, you need professional help from the experts. Failing to do so could end up costing you a small fortune in fines if you get part of the process wrong. Even just knowing which tax codes you should be using can be a minefield.

Here are some other tips to help you prepare for an audit:

• Carefully read through the audit letter – taking note of any deadlines or timeframes
• Gather documentation – including bank statements, invoices, income statements, expense receipts, etc.
• Organise your records – keep everything organised and accessible to help make the audit process easier
• Understand the laws – this will help to keep you compliant
• Review your tax return – make sure you understand each entry and have supporting documents for all reported income and deductions
• Be aware of your rights – the right to representation and privacy are key ones here

During the audit itself, we would always advise that just one person should be the point of contact with the HMRC (ideally your accountant). It is also important to take notes at every meeting and obtain any copies of HMRC recordings where possible too.

Do You Want A Hassle-Free Audit Experience?

If you follow all the steps we have mentioned in this article, this will help to make your audit experience a lot less stressful. The main thing to focus on is accurate bookkeeping and staying on top of your accounts. Your finances are not something that should be rushed, as that is when mistakes are likely to creep in.

The best thing you can do is hire a professional accountant to keep your taxes and accounts in order. Not only will they be able to ensure you are filing your accounts correctly, but they will be able to guide and support you through the auditing process. For more information about the Tax Investigations service that we provide here at Wright Vigar, get in touch with our experts.