What causes a tax investigation?

We often get asked what are the chances of being investigated by the Taxman and how they can reduce the likelihood of themselves being targetted. Below are some factors to bear in mind:

Statistics
The HMRC computer can analyse all taxpayers’ business statistics such as profit percentages and income levels. Any taxpayer who strays too far from these industry averages should ensure that they have a good explanation ready.

Random
Every year the Taxman selects about 10,000 taxpayers on a purely random basis. Obviously, there is very little you can do to reduce the chances of an investigation here.

Adverts
It has been known for the Taxman to look through the local paper and Yellow Pages etc to identify people in business and link them to their tax records. So, if you advertise your services to the public but don’t tell HMRC, expect a knock on the door sooner rather than later.

Customers
If your customer is investigated they may have to give details of their suppliers in order to get their tax deduction. The Taxman will then ensure that that particular supplier (i.e. you) is declaring the income on their tax return.

Neighbours
Finally, the Taxman does follow up tip offs from the public, so your investigation may be as a result of a tip off from your neighbour, your competitor or just someone who feels you should be paying your fair share of tax.