When does HMRC investigate self-employed & how to avoid it?

You are responsible for submitting your tax return to HMRC once a year, containing details of all your income including the profits of your self-employed business or a one man business. HMRC have geared up a number of new campaigns and acquired sweeping powers to investigate all aspects of your business and personal life to get as much revenue as possible. This may look bordering on the improper sometimes, but times are tight and HMRC can be excused to drum as much revenue as they possibly can. However, nobody wants to be investigated for their tax returns or the lack of it, and nobody wants to pay more taxes than they actually should be paying.

In the following paragraphs we shall deal about how you can avoid getting investigated, which can cause acute disturbance, distraction and inconvenience for months altogether.

When does HMRC Investigate Self-employed?

The million dollar swirling in mind right now would be as to how HMRC decides who to investigate and who to leave alone. Self-employed workers on average, who tend to handle their own taxes rather than getting it done by an accountant, are usually the one to bear the brunt of HMRC tax investigation cover. However, you need not panic if you are a self-employed worker, as you can fill in your own form and with some diligence and luck, you can most probably do it right.

In particular, HMRC has let it known that societal sectors and specific industries are generally on their radar owing to an increased likelihood of tax evasion or undeclared taxes. Buy to let landlords are one example, as are homeowners who generally sell their houses without paying capital gain taxes. According to HMRC estimation, each year the Treasury loses close to £500 million because of these individuals. Another important thing to note is that odds of being investigated are most likely to be stacked against you if you live in certain areas of the country since HMRC likes to concentrate their efforts in particular sectors and locations. Accountants in London are having their hands full with the number of self-employed people needing to file their taxes since the number of people outside of traditional employment in the City has ballooned over the past few years.

However, to be fair to HMRC, we should admit that not all taxpayers are honest. The true number of taxpayers who seek to evade their proper tax liabilities is probably somewhere between the high number suspected by HMRC and the low numbers suggested by accountants’ files. That again brings us back to the question: Who is most at risk of being investigated? The self-employed like taxi drivers and consultants are feeling the most pressure in the last few years as the Treasury takes a harder line on their expenses and incomes. Even freelancers and car boot sellers who make a little income on the side have increasingly found themselves on the wrong side of HMRC investigation. If you are to be investigated HMRC will write to you and / or your accountant to inform you of this. He or she will demand the presentation of certain documents, set out below, to be delivered by a specific date.

The logic being self-employed people are the most vulnerable is easy to understand. Self-employed people are extremely busy. For example, a taxi driver is losing money as he spends time filing tax forms rather than driving a taxi. So, quite naturally, self-assessment forms are not given the proper care or treatment as it is more of a rushed-up job. A hurried job could lead to spelling mistakes, missed calculations and other sundry types of error.

Also, what makes self-employed people increasingly susceptible to HMRC investigation is inconsistency in their yearly earnings. Their earnings can significantly vary from one year to another. For example, if they declare earnings of £100,000, and the next they only declare £50,000, then HMRC can be expected to lean a bit harder on them. This sort of scenario is completely plausible; unfortunately it leaves thousands of self-employed small business owners around the country at the receiving end of HMRC investigation and tax headaches every year.

What are HMRC’s new tools of investigation?

Before self assessment around 1 in 100 tax returns were examined; now the number will be around 1 in 10, possibly even higher as HMRC gains access to new resources. That means that every taxpayer – and that generally means every self employed person – will get inspected within a ten year period. The newest tactic that HMRC is employing is a Big Brother-style computer system, known as Connect, which is rumoured to have more data than the British library. This computer is leading-edge and equipped with unheard of processing powers thus giving HMRC access to a large database of self-employed people. It is the reason why the number of letters received by self-employed workers about tax seems to be increasing.

The system equipped with amazing processing power provides extraordinary ability to HMRC cast a wider net around tax dodgers. It collates all known information about the British workforce- from DVLA registration records to insurance documents and any financial information that local councils might have. The data collected is analysed using sophisticated and closely guarded formulas, which in turn provides HMRC with a clear picture of sectors failing to pay their tax dues.

This, however, is not the only tool in HMRC shed that they widely employ to catch tax dodgers. An old-fashioned method that HMRC still uses is the scare tactic. Their favourite way of scaring tax-paying self-employed workers to pay their share of taxes is by adopting a stick and carrot approach. They are threatened with a hefty fine if they fail to pay their taxes in the extra time given to them. This scares the majority of the self-employed workforce to cough up their share of legitimate taxes.

Jail term is another of HMRC’s scare tactics to drum up cash. Of course, not all people playing truant are prosecuted, but nevertheless few are slapped jail terms and this serves as a deterrent for other tax evaders. One self-employed full-time eBay trader was recently put in prison for two whole years after not declaring tax on hundreds of thousands of items that he sold on the website. This example, and several similar others, serve as a reminder to the general public of what awaits them if they keep on with their tax evasion ways.

What should I do?

The options available to you are pretty limited if you are hell-bent on filing your own taxes. To avoid intimidating letters from HMRC and fine, it is strongly recommended that you check every detail you have filled at least thrice. This, however, is easier said than done as the extra time spent doing this means lesser time for your own business. Explaining any major variations in income is also useful: for instance, did your business purchase any new equipment this year, or did you have to take significant time off sick?

Under such circumstances, the most prudent option is to let professionals handle your taxes while you keep yourself busy with what you do best. Professional accountants are experts in their field of work and possess deep knowledge of how HMRC works. If you have just been notified you are under investigation, it is the best time to seek professional help as your accountant Brighton is also skilled at presenting the facts in the best light.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.