Guest Article by Gloria Murray, Accountant and Director of Murray Associates Accountants
The envelope from the HM Revenue and Customs (UK) or the Revenue Commissioners (Ireland) dropping through the door’s letterbox and onto the mat is normally most people’s nightmare scenario. Worse, when you open it and understand that the taxman wants to carry out a tax inspection, you panic a wee bit more. Whether it’s personal, VAT, corporation tax or PAYE, the feeling of helplessness remains the same: “I don’t know what to do...”
Tax Inspection Tips
Make Sure Your Bookkeeping Is In Order
The best way to come out of a tax investigation situation smelling of roses is to make sure your bookkeeping is in order from the very start.
You can use one of the fabulous versions of cloud bookkeeping out there to take a lot of the work out of it. The information from your bank statements can be downloaded straight into it if the bank or credit card account is linked. However, you still need to categorise the information and make sure the VAT is allowable. Get a bookkeeper or your accountant to do this – let’s be realistic, you’ve got plenty of other things to do with your time than doing all the bookkeeping!
Contact Your Accountant
Do this straight away. A tax inspection can be triggered for various reasons, and it could be there are discrepancies in your accounts, so ask your accountant: “Is there anything unusual compared to last year?”
- If your accountant is registered as your agent, he/she will receive a letter a day or two after you. If you have a good accountant, then they will already have made sure you have tax investigation insurance with them and can look after everything for you at no extra cost. It’s really best to let someone who’s previously dealt with such enquiries do it for you.
- If you don’t have an accountant, then you will have to do everything yourself. Look at what is being asked from you in this tax inspection and send in the corresponding information only. Most personal or corporation tax enquiries start off by looking at a few aspects of the business. If inspectors are satisfied with your answers, they will usually close the enquiry fairly quickly. They may call you up, but do not dig a hole for yourself. Make a note of the extra questions, tell them you don’t have that information at hand and that you’ll get back to them.
If it’s a VAT or PAYE enquiry, tax inspectors will arrange to come to where you hold the information.
If you don’t have a separate office in the salon, I would suggest getting them to come to your home (as long as you are squeaky clean!). Sometimes, these enquiries are ‘fishing expeditions’ and inspectors will look for anything that might indicate you’re doing something wrong. So, if your profit is £/€/$10K and you’re sitting on a top of the range sports car in the driveway, that will ring alarm bells and raise their suspicions. Same if they come to the salon and you have 10 people working there with only 3 on payroll and no chair rental agreements (and if that is the case get them in place).
Separate Your Bank Accounts
Make sure you have a separate business account – it could be personal but used only for business. Tax inspectors trawl through accounts only relating to your business. This means that if you have a separate account, you won’t have to go through the headache of justifying the income coming through any of your personal accounts.
Final Thoughts & Advice
My best advice is to make sure your paperwork is well organised and get yourself tax investigation insurance! If you’d like advice on a cloud-based accounting software, then drop me an email firstname.lastname@example.org. Alternatively, if you’re looking for a safe place to ask questions and get business tips, I invite you to join my Facebook group.
Thanks for reading,
Gloria Murray is a Glasgow-based triple award-winning accountant who has also been awarded the Most Innovative Business Advisor in the UK in the 2020 Annual Innovation Awards 2017. Director of Murray Associates Accountants, she specialises in helping small business owners grow sustainable and ethical companies that not only provide a better service to their customers, but also contribute to local employment. If you would like to get more business tips from Gloria, you can get a free copy of her printed business magazine by sending an email to email@example.com.