One of the main reasons HMRC will start an investigation is if there are inconsistencies in your returns – for example, if the information you provide them doesn’t link to your bank account records. It’s important to declare all income and check any interest on savings accounts before submitting your annual accounts to HMRC.
Another common reason we hear about that prompts investigations is when your income and expenses have changed quite a lot from the previous year – for example, if you have taken a year off for maternity and declared a lot less money than the year before – or if your income suddenly increases by a large amount to the previous years because you have taken on more children – or if you are paying a staff member and their wages mean higher expenses. There are notes sections in your online return which you can use to record why there has been a significant change to income or expenses.
Mistakes happen and HMRC are watching for them – whether they are intentional or an accident, they can trigger investigations. For example, you might input the wrong figures or add things up wrong. It’s important to double-check your figures before you start your return and to check with HMRC if you are unsure which boxes to complete or which sections of the return you need to use. It can help to set aside uninterrupted time to input your figures, so you don’t make mistakes because you were distracted.
HMRC encourages other agencies to report tax fraud, so that might trigger an inspection - or someone could simply want to make your life difficult by reporting you. They also sometimes do carry out random tax investigations.
During an investigation, HMRC will want to see all your records – they might ask to see them by email, through the post or, in some cases, an investigator might come to the house. They will give you a timescale to provide the information which you must keep to – and they might request further documentation if they are not satisfied.
If an investigation does happen to you, you have the option of asking advice from an accountant or tax advisor who can guide you through the process, help you respond with the correct information and protect your rights. Taking advice could be helpful in the longer term, because if HMRC do identify issues with your tax, they have the power to add financial penalties to your account or even prosecute you.
The most important thing you can do to avoid an investigation is to keep accurate records of everything that comes into and goes out of your childminding business. Do not automatically trust any spreadsheets or systems that you use and check your adding up, because you are responsible for what you put into the HMRC system, so you should make sure every number in your accounts is correct.
Useful guidance –
**HMRC expenses arrangements for childminders –
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim52751
**Childcare.co.uk free accounts guidance –
https://www.childcare.co.uk/childminders/accounts
**Childcare.co.uk free budget planner –
https://www.childcare.co.uk/childminderorganiser
I hope this helps. Sarah.