Tax Investigation - Our 3 Favourite Ways To Avoid The Problem
If you are faced with a tax investigation then we suggest you come to love your tax inspector.
Be especially nice to the Taxman when he turns up and keep your fingers and toes firmly crossed that he is in a good mood!
Of course, the tax rules are so complex that it is not always easy to know in advance whether you have complied with all the rules. This can result in a few sleepless nights and makes for a tense tax investigation visit.
So a far better strategy in our view is to avoid a tax investigation altogether. How do this is a matter a avoiding a good risk reduction strategy and being organised. What this means on a practical level is highlighted below!
Tax Investigation - 3 Ways To Avoid The Pain!
These are our 3 favourite tips to avoid a tax investigation:
1. Always pay your tax on time
The Taxman has strict deadlines for the payment of tax. If you are self-employed he will expect you to pay your tax on 31 January and 31 July of each year.
If you are a Small Company then you must pay your Corporation Tax within 9 months following the end of the Company's accounting year-end.
If you miss any of those dates then you will incur interest on the late payment, and there are penalties to pay. Worse the Taxman's computer system will log that you as late and you'll immediately be flagged up on his interest list.
Tax Investigation Avoidance Tip - Diarise your payment dates and include an automatic reminder so that you never forget to make your payment on time.
2. Always get your Returns in on time
The Taxman also has strict deadlines on when the year end forms need to be submitted. If you are self-employed then your Tax Return must be submitted by 31 January following the end of the Tax Year.
If you are a Company then you have 12 months following the end of the accounting year-end.
If you miss those deadlines then you will be fined a penalty. The Taxman's view is that if you're late then you've got something to hide. It's hardly surprising therefore that you move up his hit list for investigation.
Investigation Avoidance Tip - Make sure you pass your records to your accountant with plenty of time to spare before the deadline date. Don't give them any excuse to not have the Return filed on time!
3. Use a good bookkeeper to keep proper books of account
Excellent record keeping is essential. It will help you answer any queries the Taxman may have regarding your tax or accounting transactions.
This includes keeping copies of all your invoices, receipts, business bank account statements, and any other relevant company documents like share certificates, directors loan agreements, and dividend vouchers.
Investigation Avoidance Tip - Find good bookkeeper if you need one. If you can’t find one in Staffordshire, then ask us for a referral to one we recommend.
Further Investigation Avoidance Tip - Start using our favourite Cloud Computing accounting system - Xero. We use Xero ourselves and recommend it to all our clients. Its easy to use and will really help show the Taxman that you are on top of your accounting records in one place, which you can access at any time!
Here are another 3 tips to help you avoid a tax investigation:
4. Avoid any unexpected variations in your income or expenses.
Significantly fluctuating income or expenses will always draw the Taxman's attention.
His computer is designed to throw out exception reports to highlight such variations.
His computer is also designed to compare your profit margins and expenses with other businesses in your industry. If your figures are unusually high or low expect the Taxman to ask why.
Investigation Avoidance Tip - Review your accounts and Tax Returns for significant changes between this year and last year. If the change is due to a mis-analysis error then correct it before submitting your Return. If the change is genuine then use your Tax Return's white space to explain the fluctuation to the Taxman so that he does not have enquire further.
Further Investigation Avoidance Tip - Low profits arouse the Taxman's suspicion. Make sure that your gross profit is in line with similar businesses.
5. Do not allow your director's loan account to go overdrawn
If you're a director of a Limited Company and withdraw money from it without it being classified as either Salary, Dividends or Reimbursement of Expenses, then the withdrawal will go against your loan account.
If the loan account ends up overdrawn as a result it will appear to the Taxman that you are mixing up your personal and Company expenses.
This is something that the Taxman is suspicious of and will significantly increase the likelihood of you being selected for investigation.
Investigation Avoidance Tip - If you have a Limited Company ensure that you only ever with draw funds from it for your Salary, Dividend or Reimbursed Expenses. Plus make sure that the money you take out of the business is enough for you to live on.
6. Make adjustments for private use
If you are a sole trader or partnership then it's likely that you'll have some costs where there is a private element to them (i.e. telephone).
If you do not show your private usage on your Tax Return then the Taxman will assume you are not making reasonable assumptions about your business vs personal usage and therefore will enquire into your Return.
Investigation Avoidance Tip - For items such as telephone costs make sure you enter the total cost in the left hand column of your self-employment expenses page and the private element in the right hand column. It will then be clear to the Taxman how much private usage you have allowed for.
Because any return can be selected for enquiry, keep all the documents and information you used to prepare your tax returns at least until the time limit allowed for the Taxman to make an enquiry has passed (ideally six years). Another reason why we recommend Xero to all our clients because all this is stored in the cloud and accessible at any time!
Our Tax Investigation Call To Action
Being the subject of a tax investigation is not on the list of things business owners should look forward to having done to them.
Statistically the longer you are in business, and the bigger you get, the chance of your receiving a tax investigation rises.
You can minimise the risks of getting one or multiple ones by following our top tips to make your business look normal and legitimate. Follow them to avoid the computer saying yes to you getting a visit!
If you know of any other great tips for avoiding a tax investigation that can be shared with our readers then let us know via the comments or through LinkedIn.
Remember, avoid a tax investigation is often simply an off-shoot of good risk management and good habits. Being well organised is good for you and your business, and will avoid that painful visit from someone who is not your friend!
The PJW Call To Action
If you want to talk to us about using more of our top tax tips to help your business save real money then do the following:
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Remember - Don’t Leave a TIP with the Taxman!