If you work for yourself, you might be wondering: when does HMRC investigate self-employed people? The answer is that no one really knows; HMRC has never disclosed exactly what triggers an investigation. It could be due to any number of reasons, such as late payments, discrepancies in your finances, or a random audit.
HMRC is responsible for ensuring individuals and businesses pay the right amount of tax, and claim the correct benefits (if applicable). HMRC has various mechanisms to achieve this remit, one of which is HMRC investigations.
An HMRC investigation is when HMRC officers take a deep dive into a person’s or business’ financial affairs. The investigation might just focus on one area, such as VAT payments. This is known as an aspect enquiry. Or, it might look at the complete picture. This is known as a full enquiry.
When does HMRC investigate self-employed?
Self-employed people fall under HMRC’s scope, just as all other UK taxpayers do. In fact, sole traders may be observed particularly closely, given that they are responsible for submitting their own tax returns. This differs to employees on the payroll, whose taxes are deducted by their employer and passed to HMRC.
HMRC has never said exactly what triggers an investigation. However, self-employed people could be investigated due to:
Account discrepancies – HMRC has a sophisticated computer system called Connect. It cross-references tax records with third party databases to identify anomalies between things like property income, bank interest and tax returns. Anything that doesn’t quite add up may be examined in greater detail.
Late or missing returns/payments – tax returns must be filed by certain deadlines, and tax owing must be paid within specified time frames. Late or outstanding returns or payments could indicate to HMRC that something is amiss.
Tip-offs – HMRC sometimes receives tip-offs from members of the public who think an individual or business is evading tax, or is committing benefit fraud. HMRC takes these tip-offs seriously and may investigate the claim further.
High-risk industry or location – certain industries are thought to be at a higher risk of fraud, as are certain locations within the UK. It is said that buy to let landlords have a greater chance of facing an HMRC investigation, as are those who operate out of London. Sectors where ‘cash in hand’ is a common feature may also be targeted.
Random investigation – HMRC investigations are occasionally conducted at random. This means that in theory, all self-employed people are at risk of an investigation, regardless of the quality of their self-assessment tax returns.
How do I know if HMRC is investigating me?
You might not know that HMRC is investigating you in the initial stages. Subsequently, you or your accountant will receive a letter from HMRC stating that you are under investigation.
Are you facing an HMRC investigation?
If HMRC investigates you, then there may have been some kind of red flag that has prompted them to examine your financial affairs. Having said that, investigations are also conducted at random, so you may simply be one of the unlucky ones.
Either way, the main thing is not to panic. An investigation does not mean that you have been found guilty of fiscal wrongdoing. Rather, it an opportunity for HMRC to check that you have complied with UK tax/anti-fraud laws. The investigation may be completely random, or based on false or misinterpreted information.
We recommend contacting our solicitors as soon as you receive a letter stating that you are under investigation. You can ask your accountant for help, but accountants are not subject to professional privilege in the same way solicitors are. This means that correspondence between yourself and your solicitor must remain confidential, unless you expressly allow the disclosure of these materials.
Speak to our solicitors now
At Altion Law, we provide advice to those who are under investigation by HMRC, be it a criminal or a civil investigation. We can explain what it means and what your options are. If you believe there has been a mistake, we can represent you throughout legal proceedings.
We strongly advise you to contact us as a matter of urgency so that we can explain your legal rights and options. For a confidential discussion with a member of our team, please call us now on 01908 414990 or complete an Online Enquiry.