Auditing is something every business fears. It’s where a representative of Her Majesty’s Revenue and Customs (HMRC) will investigate your accounts to make sure you’re paying the right amount of tax. It’s stressful and it’s intrusive, but it’s the law. HMRC actually have a concrete list of objectives, which just goes to show how complex the process is.
Nobody knows how much of a risk you’re at when it comes to auditing. HMRC doesn’t publish this information, nor do they publish how they choose targets for auditing. According to tax experts questioned in an investigation by The Guardian newspaper, auditing is performed both randomly and when HMRC have a reason to suspect dishonesty.
The key to lowering your risk is simple. Don’t give them a reason to suspect you’re exaggerating the figures.
Office equipment is an area where business owners are often thinking about exaggerating how much they’ve spent. They believe HMRC aren’t going to care about the occasional £20 here or there. The truth is they won’t care, but it’s tempting to keep pushing the boundaries, and this is where so many businesses go wrong.
If HMRC discover you’re exaggerating how much you spend on office supplies, they’ll see even the slightest omission as an indication that something more serious could be going on.
Selling on Online Platforms
Many businesses possess eBay and Amazon stores. If you’re selling some household items for a profit, it’s not a problem. They don’t mind someone making the occasional sale. Plus, it would be impractical to attempt to force people to pay tax on absolutely everything. The problems start when you’re doing it so often that it could be considered legal trading.
HMRC have tonnes of resources at their disposal to find out about online sales. They regularly monitor Amazon and eBay sellers. If you’re selling too much and not declaring the income, it could well trigger an audit.
The Wrong Tax Number
Every entity that should be paying tax will have to enter a unique number to identify them as a taxpaying organisation. The number is different for businesses and individuals. Every year thousands of people will enter the wrong tax number. It’s a serious offense because it can lead to you paying a much lower amount of tax, due to the various tax breaks for certain groups.
Even if this was an accident, it might still trigger an audit. It’s one of the easiest ways for someone to trigger an audit.
The most obvious issue of all is simply messing up the numbers. We’ve all made mistakes on our tax returns from time to time, but this is also why we have accountants. HMRC still expects you to get the numbers right, no matter if this is your 1st return or your 10th return.
There are numerous ways to come to an incorrect calculation, such as adding up the numbers wrongly or just putting the wrong number in the wrong box.
If you’re paying an inordinate amount of tax, this will trigger an audit. You have to remember HMRC don’t know if you’re trying to cheat the system or making an honest mistake. They have to assume the worst, and this is why it can lead to an audit.
Avoid this by employing an accountant to deal with your tax return. They will comb through your figures and ensure you haven’t made an error.
Sometimes you’re at an increased risk of an audit due to the industry you work in. Builders and other independent contractors are especially vulnerable. Cash-in-hand payments are common and often go unrecorded. They’re also easy businesses to setup, so inexperienced people are often the ones filling out their tax returns.
HMRC searches for where unpaid tax is likely to be, so if you’re in a high-risk industry, you have a naturally higher risk of an audit.
Why Tax Software is Essential
Specialised tax software is essential for lowering your risk of receiving an audit. It seems like it shouldn’t have any impact at all, but you have to look at the message it sends. Any accountant will prepare your returns using software. There are literally hundreds of options available to you, and most of them do the same things. If you’re having trouble using software, this is where you need to hire the services of an accountant.
In terms of an auditing risk, HMRC prefer computerised tax returns. It’s easier for them because it’s more organised. And it demonstrates you’re more organised. If you send in a piece of paper with sloppy handwriting and lots of different crossings out, this shows you aren’t organised.
HMRC may decide to audit you just in case you’re one of those people who tend to miss things out. Any signs of disorganisation will flag you as a potential risk.
Visit the HMRC website for a full list of certified suppliers of commercial tax software. You can’t go wrong with them, plus by using a software provider HMRC has endorsed you’re less likely to receive an audit.
Another interesting behavioural attribute HMRC look at is your deductions. These deductions could include anything from travel expenses to office supplies. You’re well within your right to deduct these items. What you need to avoid is using round numbers, such as £100, £2,000, and £3,500.
As we know, most items from a store will never cost a full round number. They’ll cost £0.99, £1.99, and £2.99. If you’re using a round number as a deduction, it shows you’re estimating the deductions instead of getting the numbers exact. In most cases, HMRC won’t care when it comes to a few pennies. What they will wonder is whether you’re estimating in other areas.
Round numbers are an example of inaccuracies and a potential audit could be on the way.
Although these tips all look at different aspects of the tax process, they have two principles in common:
Inaccuracy is the most common example of what can trigger an audit. This occurs when you estimate your deductions, demonstrate disorganisation, and enter the wrong tax numbers. These are well within your control and you can stop these mistakes by keeping accurate records and using a professional accountant.
Some industries are simply more prone to audits than others, as described above. This is mainly due to stereotyping of certain trades, where tax fraud rates are far higher than in other industries. In truth, there’s little you can do about this, but by submitting accurate tax returns time and time again HMRC will feel less of a need to send an auditor around to inspect your records.