I have recently received a notice from HMRC opening an enquiry into my business.  On what basis will HMRC have selected me for enquiry?

HMRC has a variety of techniques which are employed in deciding whether or not a business should be investigated.  This “risk assessment” process can be very informative as it will compare the results of the business to other similar businesses, it will produce statistics such as gross profit margin, mark-up rate and comparisons to earlier years. The problem is that if a case is “risk assessed” the officer cannot decline the invitation to investigate. Officers have quite openly admitted that they had no choice but to open an enquiry, even though they knew that there was nothing in it for them, because the risk assessment process had identified the case as warranting an enquiry.

When risk assessing a business there are certain trigger points that HMRC will look for.  HMRC loves to see consistency across a business, both within the business itself and also across similar businesses.  It will expect turnover to be fairly level whilst accepting modest fluctuations in either direction. If turnover goes down it will expect expenses to decrease.  If profit goes down HMRC will raise an eyebrow if proprietor’s drawings/directors remuneration goes up!

If turnover increases substantially it begs the thought that maybe not all of the turnover in the previous year was declared.  If it drops significantly then maybe some has been taken by the owner and not declared?

Suspicion is aroused if the claim in respect of power and light increases well beyond what would be expected comparing it with the previous year (and bearing in mind known increases in tariff).  The HMRC officer will wonder whether working hours have increased (hence the increase in power/light) and therefore the officer will wonder why turnover has gone down!

Proprietors drawings will be similarly scrutinised – a substantial increase could mean that drawings may have been understated in the past, leading HMRC to wonder whether any cash takings have found their way into the proprietors pocket rather than the company’s books.  If the drawings are less than the salary paid to the highest paid employee HMRC will be very uneasy – business owners are expected to be the highest earners in the business!

Finally gross profit margins are a favourite barometer for judging whether or not a businessman is declaring all of his income to HMRC. The GPR of the business will be examined over a period of up to 6 years to see whether or not it is consistent.  It will also be compared to similar businesses and fluctuations of more than 3% will arouse suspicion.  HMRC has access to a wealth of information to indicate what the GPR of a particular type of business should be and will be well aware of most of the tricks which the less scrupulous businessman may try in order to disguise the true GPR of his business.