If you are self-employed you are required to submit accounts to the Inland Revenue together with income tax and capital allowances computations each year as part of your SAT Return.
If you have engaged our services this will be done for you but you need to keep basic books, recording all income and expenses. See our separate page on this subject. Most of the time though your accounts will not be examined in detail by the Tax Inspector but will be accepted.
What does HMRC look at
There will be points that the Tax Inspector will be looking for when he examines your accounts, some of these are listed below and include...
Insufficient own drawings from the business to meet private expenses such as housekeeping, mortgage, private hire purchase, clothing, smoking, drinks, entertainment and holidays.
You have some form of income that has not been included in your annual Tax Return, or the interest shown on your Return indicates a higher rate of savings than would seem likely from your drawings from the business
The accounts do not include adjustments for the private usage of motor vehicles, telephones, or own accommodation, etc.
Business economics review - a comparison with similar businesses is made.
You have not kept a full record of drawings from your business.
Monies paid into private bank or building society accounts do not tie up with your drawings from the business.
You issue invoices to customers and a number of invoices have been cancelled and all of the copies have not been kept by you. Here the Revenue take the line that the taxpayer was probably paid in cash and has destroyed the evidence.
The Inland Revenue have received a letter or a telephone call from a member of the public.
You had a new source of income which had not been notified to the Inland Revenue within the time limit set out in the Taxes Act.
You had monies not necessarily taxable such as a win on the lottery or football pools but this enabled you to live on less than the normal amount of drawings but the Tax Office were not aware of this.
You are chosen for random audit under the new system.
What then ?
If any of the points above alert the Tax Inspector to have a closer look at your accounts or you are in a business that has been specifically targeted for investigation, the Tax Inspector will ask to see YOUR basic records from which YOUR books have been prepared together with YOUR books that you produced to your Accountant to enable the accounts to be completed some time after the end of the year. He also wants to see whether your records are complete. All entries made with one pen might indicate that you wrote your books up from one sitting thus casting doubts on accuracy.
If the Inspector is satisfied after looking at YOUR books enquiry will end.
If the Tax Inspector is not satisfied you will be asked many questions.
Usually this means that the Inspector will ask you and your Accountant to attend an interview at the Tax office where the Inspector will ask questions about
your business your private expenses your savings. the records that you keep
If you cannot satisfy the Inspector the Inland Revenue may demand additional tax plus interest and penalties.
What can you do to avoid penalties?
The answer lies first and foremost in the standard of the books, which you keep, and secondly as a safeguard whether or not your Accountant carries out a full check of your books.
The requirements of a full check are explained with our Gold Service.
As far as book-keeping is concerned if you follow our recommendations and keep honest and complete records you should have no problems that we as your Accountants cannot resolve.
We settled a tax investigation recently where the client did not have complete records written up on a daily basis, which resulted in over £3,000 extra, tax and penalties being paid.
The initial tax demand was for over £20,000 and it was only after prolonged negotiations with the Tax Inspector that the figure was reduced.
Had full records been written up regularly we feel sure that we could have agreed that no additional tax was payable. In another case full records of takings and expenses were kept but unknown to us the client paid moneys into a private bank account which did not tie up with his drawings from the business. In the absence of an explanation as to where the moneys came from he had to pay additional tax and penalties on these credits.
If you are investigated your basic records will be requested by the Income Tax Inspector including diaries and note books like that suggested above.
Without such records the Tax Inspector will view your business records with some scepticism.
See our advice about book-keeping. Remember if you keep accurate books and use our Gold service we will not charge you for the time we spend dealing with enquiries raised by the Inland Revenue provided that those enquiries do not show that you have omitted income from your records.