Tax audits: A survival guide for small business owners

Any form of contact from HMRC regarding a tax audit is enough to make any small business owner feel a little uneasy, but a good level of organisation and constant communication with your finance department can make the whole process much simpler. The systems and technology that HMRC utilise can easily identify anything suspicious within your activities, meaning that anything illegal, no matter how big or small, you will be caught.

A tax audit conducted by HMRC gives them an opportunity to look at various aspects of your finances to determine whether or not you have provided them with all of the relevant information. Throughout their audit they will be looking for a number of things:

• You have declared all of the income that the business has received.
• Whether or not you have reported the correct PAYE amounts.
• If you are entitled to the credits, deductions or tax offsets that you claim.
• Whether or not you have correctly fulfilled all of your tax-based obligations.

In order to help you make it through your tax audit with full compliance and confidence throughout, we have created a guide of helpful pointers to follow prior to the actual audit.

Ensure that you keep an accurate record of the last five years.

For small business owners, keeping an organised collection of records and paperwork can often be a difficult task, despite this being very important to the business. Using a good quality system or an easy accounting system may be the answer to your problems, particularly as you would be able to keep a log of everything in an easily accessible way. These types of software are usually fully equipped with all up to date tax regulations and allow for the easy inputting of data whenever necessary.

Although an audit is conducted on the tax returns from the previous financial year, auditors can sometimes wish to see records from previous years if they have suspicions that there may be something wrong. An accurate record of the last five years together with an organised system is sure to enable you to be fully compliant throughout the whole process.

Make sure everything is correct when completing your tax return.

It is very important to ensure that all of the information included within your tax return is correct, with no errors. A typical feature of many tax returns is numerous mathematical errors, so checking over everything that you do is a good way of making sure that everything is correct. On the other hand, if you do find that you have made an error within your tax return, it is much better to come clean about it before the audit takes place as it could lead to reduced penalties from HMRC.

Organised preparation is important.

Once being made aware of HMRC’s intentions to conduct a tax audit, you should make sure that you are fully prepared and have all related items organised in a helpful way. There are also a number of things that can make the audit process run smoothly and ensure that there are no problems:

• Consult your account and inform them of the audit.
• Determine what HMRC are likely to need to see and locate all of the relevant paperwork.
• Appoint one individual, typically your accountant, to be the main point of contact between your business and HMRC.
• Make notes on all dealings with HMRC, log all forms of contact and obtain HMRC recordings where necessary.
• Act in a professional way and be respectful throughout any dealings with HMRC, speaking only about necessary topics.