If you run a small business, one of your key duties is to handle its tax matters. If HM Revenue and Customs (HMRC), believes that your firm is failing to meet its tax obligations, they will investigate. This could bring consequences, such as financial penalties, that will cut into your profit margins, so it is best to be prepared.
Here are seven reasons why your small business may be audited by HMRC and what you can do to avoid penalties.
- You’ve made some mistakes
Human error can sometimes be enough to raise a red flag. If it is something small, HMRC may let it go, but if you make consistent mistakes when filling out your firm’s tax returns, such as submitting inaccurate figures year-on-year, they will wonder whether they’re genuine mistakes or something misleading. It is wise to hire experts to avoid making mistakes, and we can help. As part of our corporate services, we can complete your annual return error-free for you.
- Your numbers fluctuate
Businesses have good and bad years. But if your numbers fluctuate too wildly – say you earned £900,000 in 2015, but £150,000 in 2016, it is going to catch HMRC’s attention. The best tactic is to provide context. State the reason for the drop e.g. did you reduce your working hours in the second year – on your business’ annual tax return? Context will enable HMRC to understand any glaring discrepancy, potentially preventing the need for audit.
- You are specifically brought to HMRC’s attention
Someone may decide to tip off HMRC and, although the agency often treats these instances with caution, they may investigate if they grow suspicious about your company. The most common causes of a tip off are disgruntled employees, the existence of a cash-only policy at your firm, and evidence to suggest that you are living beyond your means. Some are easier to deal with than others.
The first two are simple enough to resolve. In the case of the disgruntled staff member, simply make HMRC aware of the circumstances, while if you have a cash-only policy, introduce a card transaction system at your business. If you are thought to be living beyond your means, things get trickier, as HMRC may believe that you are receiving cash from elsewhere – e.g. trust funds. It is important that you can account for every penny your business earns in your returns, so this does not become an issue.
- You are being altruistic
One major red flag will be if, as the company director, you are earning less than your employees. HMRC may believe that you are drawing profit from the company, via avoidance schemes, to supplement your own income, and they will definitely want to investigate. You may be tempted to be altruistic and take a lower salary than your employees, but this is a bad idea. It is more advisable to maintain the status quo and reward your staff through other means, such as gifts.
- Your profits are consistently low
If you have been running your firm for years and you have yet to turn a profit, HMRC is going to wonder why. Yes, some companies do post consistently low profit margins, but most do not, so this is a real red flag as, if you say year after year, that you owe no tax to HMRC it looks suspicious. Again, the best way of dealing with this is being open and honest, by stating the reasons why in your tax returns.
- Your numbers do not tally with industry standards
HMRC has a good idea of what your business should be earning for its industry. If you are a national accountancy company, for example, it would be normal for your business to earn in excess of £25,000 per annum, but if you are a local gardener, HMRC would probably not expect you to earn anywhere near this figure in a given year. Obviously, this is another reason to investigate your company.
It is critical here that you find the type of business model that is suitable for your industry and the size of your company. If you are a one-man band, it can be advisable to register as a sole trader, as HMRC expects micro-businesses to adopt this model. However, if you are looking to grow your operation, it may be better to go for a limited company, which lends your personal finances extra protection. The Turner Little team is very experienced in forming limited companies, so we can provide aid here.
- You do not state your income
There are so many reasons why you should be completely open, when completing your business’ tax returns. Another is that if you decide to omit any payments you have made to other businesses – including lenders and banks, HMRC will notice, as they are monitoring millions of companies apart from your own. If HMRC find any discrepancies, they will look into them, creating issues for your firm.
Rely on effective advice
It can be difficult to navigate business tax matters, and while you can be the most open, diligent company around, sometimes you may still be targeted by HMRC for investigation. It is critical that you have experts to hand, so you can minimise the risk of appearing on HMRC’s radar, or resolve the issue speedily if you do. Through our corporate services, you can utilise a business and legal advice retainer, supplying you with the support you require to ensure your enterprise’s taxes are always in order.