The idea of tax auditing can be a scary one, especially if you’re inexperienced in business finances. Essentially, being audited means that the tax authorities wish to investigate your company in more detail to ensure that you’re meeting the legal requirements for payments. If you’re unsure of how to deal with an audit, then keep reading: these are some of the key questions people have, complete with our answers. Remember, it’s also always worth consulting a tax professional who meets the national assurance standards, as they’ll have better in-depth knowledge of what is quite a unique area of business management.
Why is my company being audited?
The likelihood is that the tax authority has analysed your file, and decided that there are some aspects of it that they consider to be questionable. On some occasions, they may suspect you of serious avoidance, and on other occasions it may simply be that they feel you might be claiming a couple of non-legitimate expenses.
Should I be concerned?
As a general rule, this rather comes down to whether you actually have been acting in accordance with the law! However, tax authorities do not typically accept ignorance as an excuse, so if you’re uncertain about anything it is vital to take steps in order to rectify the situation.
What sorts of things with the tax authority look at as part of the audit?
Usually, they will explore those areas that first raised their suspicion. The most common tax errors are usually found in one of three places:
Expenses
Unfortunately, there are still many sole-traders and companies out there that try and claim non-legitimate expenses off their tax bill. For instance, once a company reaches a certain size, they may be tempted to start claiming tax relief for things like travel, accommodation and entertainment, especially for those senior management figures who’ve grown keen on the perks! Whilst on some occasions these expenses are legitimate – ie, there really are potential clients that you’re trying to win over, or you really are paying for a hotel room to attend a work conference – any large expense is likely to be subject to investigation.
Petty cash
Whilst a great many companies (even typical ‘blue collar’ ones) now use electronic payment, it’s virtually impossible to avoid petty cash altogether (even at a basic level, you’re going to need tea and coffee for the office!). Unfortunately, tax authorities often view petty cash spend as suspicious once it reaches a certain level, simply because it’s so easy for a few quid here and there to conveniently disappear.
Contracting expenditure
Many smaller companies these days make use of independent contractors here and there to take on jobs that it’s not worth hiring a full-time employee for. Because this is a claimable expense, the authorities will view with suspicion any firm that makes use of it to a large extent. Simply, they consider it likely that the firm might be ‘hiring’ friends and relatives so that they could subtract their payments from the company profits, and then pick the money back up from their associates later on. Needless to say, such an approach is illegal.
What action can I take?
The most important thing that you can do is to go through all of your company’s financial records, and then run a side-by-side comparison with the tax return you provided. This way, you can check if there are any discrepancies between the two, and take immediate action if there are. If you think that your firm has made a legitimate mistake (it does happen, everyone’s human!) then it pays to be upfront and honest with the tax authorities rather than being stubborn and denying anything. This way, they’re more likely to just ask you to pay the outstanding balance, and are less likely to take a more hard-line stance.
Remember, experts help
As with absolutely any financial issue, you should always consult a specialist if you’re unsure. They’ll understand the ins and outs of tax affairs, and be able to communicate with the authorities on a more in-depth level.
