If you’re looking to avoid an audit on your small business, you’ll need to know what HMRC looks for in your tax records and why they might choose to audit your business over another.
Find out how to avoid an audit on your small business using this guide. We’ll cover everything you need to know, including:
- How to avoid an audit
- What HMRC might check
- What happens if you do get audited
- How Countingup can help
If you’re new to the world of business and tax declarations, auditing might seem scary. At Countingup, we want to empower new entrepreneurs with the time and skills they need to be successful. Read on to find out how we can help.
How to avoid an audit
HMRC performs audits to check your business’ tax compliance; ensuring you pay what you should. Audits aren’t necessarily bad, as you may be refunded if you’ve overpaid or be granted tax relief if you qualify. However, sometimes you may be required to make an additional contribution to meet your required level if a mistake has been made.
The main way to avoid having your small business audited is by submitting honest and accurate tax information.
You can do this in a number of ways. Make sure you:
- Include all sources of income (don’t omit income or expenses as they may appear on another business’ tax returns)
- Have accurate account records across the financial year
- Have correct tax calculations and reasonable expenses
- Explain big changes to your profitability (particularly losses)
- Don’t inflate your income (have tax declarations in line with industry standards)
- Have an accountant help you calculate and file your tax returns
HMRC performs audits routinely, so it’s important to know that they may audit your business even if you do follow all this advice. Additional factors about your business may cause HMRC to proactively audit your business. These can include:
- A tip-off from someone familiar with your accounts and any inaccuracies that exist
- Cash-only transactions that can be hidden easily in your accounts
- Personal lifestyles and financial choices that are beyond what you declare on paper
- No accountant affiliated with you, especially if your revenue is large (HMRC may reasonably think you’re making mistakes or are purposely hiding your account records from experts)
- Declaring years of unprofitability in sequence (unprofitable businesses shouldn’t last long, HMRC may want to know how you’re able to continue trading)
HMRC may also seek to audit you more regularly if you have a habit (accidental or otherwise) of making mistakes on your tax returns. It’s important to build good relationships with HMRC as they have the ability to apply fines for non-compliance, so it’s always best to have an accountant help you.
What HMRC might check
HMRC asks to check the following:
- The taxes you have paid already and at what rates
- Your business’ income and expense accounts
- Your Self Assessment tax return (if you’re a sole trader or limited company director)
- Your corporation tax return (if you run a limited company)
- PAYE records for any employees you have (if you employ people, including yourself as a director)
Each of these accounting records has some input into your tax calculations, so HMRC will likely ask to see as many records as possible for the tax year in question.
Remember, your business’ financial records may have to be kept for as long as six years, so be sure to have these records (where applicable for your business) available for each tax year.
What happens if you do get audited
HMRC will first notify you and your accountant or legal advisor (if you have one) that they intend to audit your business. They’ll specify any documents they need access to (like the ones listed above), and whether they need to visit your business’ premises.
You should aim to provide the requested documents in a timely manner as HMRC may apply penalties for delays or if you outright refuse a visit. However, you can ask for the audit to stop by writing to the dedicated office that contacted you in the first place stating a reason why. HMRC make allowances for instances like personal illness and close bereavements.
During the audit
HMRC may seek to hold meetings with you (and your accountant). These meetings can happen face to face or over the phone. However, if you would prefer, you can ask HMRC to write to you for anything necessary instead. This may be more desirable for you if you don’t agree with their decision (for example, if you’re required to pay further taxes) as you’ll have a paper trail to back up any claims you have.
You can also file an Alternative Dispute Resolution (ADR) if you don’t agree with HMRC’s decision or what they are requiring records of.
At the end of the audit
HMRC will confirm whether you’ve paid the right amount of tax or not.
If you over-pay
HMRC will refund the amount to you and let you know how to avoid the mistake in the future.
If you under-pay
If you are required to pay additional taxes, HMRC will let you know how you can do this, if any additional penalties are included for non-compliance, and whether any interest is applied.
You can appeal any decision HMRC make if you believe it’s incorrect.
How Countingup can help
Tax compliance is a significant source of worry for many business owners. You can gain complete confidence in your accounts using Countingup.
Couningup is your business current account and accounting software in one app. With all your accounting information in one place, your financial admin is automated to save you time and stress.
Countingup generates accurate tax projections while you trade throughout the year, so you can set aside money to cover it. The app also has handy expense reminder features and receipt capture tools, so you can update your accounts on the go and make sure your records are always accurate.
Find out more about other helpful features for business owners here and sign up for free today.