5 points you must know on How to avoid HMRC investigation

Book keeping:

I find that when HMR&C mount investigations, the defence is hampered by poor book-keeping.  There is now a statutory requirement to keep records.  By this, I do not suggest you need to employ a book-keeper, or have a degree in double-entry book-keeping.  All you need to do is keep complete records of both your total income and all of your expenditure.

Some simple points:

  • ·         Keep the till rolls and other contemporaneous evidence of income.
    • ·      Note the cheque stubs fully.
    • ·      Balance cash weekly and reconcile to the cash on hand. The Tax Inspector/VAT officer will then find it very difficult to “break the records” and suggest defalcations.
  • Write on the pay-in slip, where possible, the customer/client name for all cheques and cash paid in.

It is not difficult to balance cash, e.g.:-

Take the cash on hand at start of period                         £100

Add cash/cheques received                                       £10,000

Total monies before outgoings/banking                     £10,100

Less cash expenses paid                                              £ 1,100


Less banked                                                                  £ 8,700

Cash on hand                                                                £   300*


*Check and compare with the cash on hand


I feel that HMR&C collect a great deal of tax by default.

This is largely due to the Investigation necessarily reviewing past years of which, due to the passage of time, you cannot remember nor have evidence.

To aid your defence I suggest you add entries to your diary or even keep a separate diary.  The entries should be anything that may help an inspector looking back understand trends, particular events and profitability.

I would suggest that if you are a market trader it would be wise to note the weather conditions; clearly, a wet, windy day would have a great impact on the turnover. How could you remember two years later?

Another example would be a fish and chip shop where the road is closed for two days due to a burst water main.  That would again affect turnover but the sands of time would dull the memory.

I keep such a diary and I make notes of odd things like the hours I work, the period of time I was visiting mother in hospital, new cases taken on etc etc. I hope this will never be needed but this may very well be useful to trigger my memory if necessary.

It only takes a few minutes but I feel very worthwhile. It may be that something written triggers the remembering of something not recorded but more relevant to the enquiry.

This is also a good place to record your private mileage. Very necessary but very few people keep such a record. It does not take long to do but will save you a lot of trouble.

I also suggest you keep photographic evidence. Take regular pictures of all changes to the interior and exterior of your business premises.

Keep price lists, menus and, in fact, all evidence that will be useful if HMR&C reconstructs the financial results of your trading. Finally remember evidence can be used against you e.g. your computer hard drive.

Care should be taken with the response to a request from HMR&C for records and a case should be made out for not supplying the appointment book and diaries on the grounds that they are not factual business records used for the completion of the return.

If you do decide to submit them make the investigator aware that he should not place undue reliance on them as they cannot be relied upon to give an accurate record of the events.

Someone may not have called resulting in no sale and on the other hand you may have made a sale to someone not entered in the diary.


It is important that if you are investigated by the Civil Investigation of Fraud Team that you seek specialist help.

Human Rights issues are also involved but I will leave that to the specialist as necessary.

Make sure that the professional has the right experience and also make sure that he keeps on top of the job and there are no delays. Delays will cost you extra interest.

Please do not leave it to the accountant to defend you. You are the only person who knows the true position.

Check everything, contribute and ensure you know what the accountant is doing. I have worked a couple of cases recently where the client was brilliant and helped bring the enquiry to an early conclusion.

Do not bury your head in the sand; it will only make matters worse. Reply to correspondence promptly.


A great source of investigation work for HMR&C is the failure of businesses to operate the PAYE system correctly.

Teams of officers arrange to call at the business premises to inspect the PAYE and wage records. Part of their investigation will be to reconcile the amount debited to the profit and loss account under the heading wages and salaries to the actual wages records.

Some of the common errors found are:-

  • Failure to operate the PAYE system correctly on directors’ remuneration.
  • Benefits not declared e.g. private health insurance.
  • Casual labour and students employed and not taxed.
  • Breaches of the minimum wage regulations.
  • Cars treated incorrectly as pool cars.
  • Class 1A national insurance not paid.
  • People treated as self employed.
  • Failure to operate the PAYE system correctly. i.e. Forms P45, P46, P11D and P46(car).
  • Wrong code number(s) operated.
  • Too much money spent per head of staff on the Christmas party.
  • The dispensation not correctly operated.

Do what you should do:

It never ceases to amaze me the number of ghosts that are discovered.

A ghost being someone with a tax liability that is unknown to HMR&C. This happens when people come to this country without registering.

Others who drop out of the system by going abroad and not registering when they return.

A client I worked for had traded for eighteen years and only got caught when he applied for a licence to sell milk. Another had traded for fifteen years and then on transfer I moved next door!

If you have not received a tax return to complete and you know you owe tax you must notify your liability to tax by the 5th October. The maximum penalty chargeable is the amount of the tax payable.

The penalty for failure to render returns is £100 and for continued failure the Tax Tribunal can determine a penalty of up to £60 per day maximum.

Source by Peter Clare