In the third post in our new series on avoiding a tax investigation, we’re discussing the legal definitions of the terms tax avoidance, tax evasion and tax planning, according to HMRC. And we’ll also take a look at the top potential triggers for a tax investigation, and how to avoid them.
If you haven’t read Part One: The Tax System, Simplified or Part Two: Are You at Risk of an Investigation?, head over and give them a read now.
Part Three: Nature of an Enquiry
HMRC can raise questions about any single aspect of your tax affairs, but there are some types of tax that tend to get more attention than others.
Income Tax
When you work for yourself or own a small business, it’s your responsibility to complete a self-assessment tax return and declare your income so that you can calculate your tax bill. You might be tempted to deliberately under-declare so that it looks as though you owe less money in tax, but it’s not worth the risk. The money you may save is nothing compared to what you could be fined if HMRC discovers your deception. And chances are they will—HMRC gets its information from many sources, and contradictory reports from other sources will almost definitely trigger an investigation into your financial affairs.
VAT
If your business turnover is more than £85,000 (2022/23), you may need to register for Value Added Tax and submit digital returns via compatible online accounting software. Making Tax Digital for VAT has made remaining compliant even more challenging for small business owners, who now have a much higher chance of making mistakes on their VAT return.
Inheritance Tax
For many years, inheritance tax (IHT) has been a source of frustration for high-net-worth individuals, who must pay 40% tax on anything over the £325,000 lifetime allowance, taking a large chunk of wealth from their chosen beneficiaries. However, with property prices continuing to rise and the IHT threshold having been frozen for over a decade, more and more families are being hit with large inheritance tax bills on the death of a parent or loved one.
IHT raises an incredible amount of tax revenue, so it’s no surprise that HMRC will take a closer look at this type of tax. Tax fraudsters often try to reduce their IHT liability by undervaluing their property. If HMRC finds out that you have undervalued your home or property, it may investigate every aspect of your estate and delay the execution of your will for months or years, incurring penalties for deliberate misrepresentation to HMRC.
Capital Gains Tax
Capital gains tax (CGT) applies to profit made on the disposal of assets, such as shares, bonds, precious metals and property. Private Residence Relief means you won’t normally pay CGT on your main or only home, but second homes and rental properties are another story.
You will only pay tax on the profit above £12,300 (dropping to £6,000 in April 2023, and £3,000 in April 2024) and there are a few other allowances and exemptions that you should be aware of before submitting a CGT return.
Capital gains tax is one of the most complex areas of the tax system, and with changes coming almost annually it’s no surprise that so many CGT enquiries are opened by HMRC.
In our next article on avoiding a tax investigation, When the Taxman Comes Calling, we’ll take a look at the Taxpayer’s Charter, and the various methods of communication HMRC may use to inform you of an investigation, including unannounced visits. Don’t want to wait? Click here to get our guide, Happiness is Paying the Correct Tax now.
Get in touch to discuss your individual circumstances and get some independent, impartial advice on your business’s tax affairs.
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