HMRC routinely check into tax returns for individuals, partnerships and companies. These can be a random review or a targeted approach into a business sector. HMRC has a super computer where all manner of data is automatically fed into, e.g. all debit & credit card sales by all retailers' are directly fed. HMRC also has direct links with all banks and other agencies like Land Registry. They know when property is bought and sold, so if a rental property is sold, they will expect to see a Capital Gains Tax calculation, if they do not, they may ask why.

Types of inquiry

• FULL INQUIRY - where HMRC reviews the whole tax return. In fact they will review your entire personal financial system. They will ask for your complete personal spending; i.e. starting with all monthly bills, all debt payments (loan/card/catalogue/finance), moving onto a questionnaire, 'how much do you spend on xmas presents, birthday presents, holidays & holiday spending' etc.; absolutely everything.
• ASPECT INQUIRY - where HMRC reviews a few sections only of the tax return, e.g. repairs or loan interest.

FULL Inquiries are fortunately quite rare and during my career I have only seen them a few times. Essentially they want to establish that your entire personal spending can be covered by income from the business/spouse or even a debt increase.

ASPECT Inquiries cover all other reviews and by far the most common.

Even if everything is done correctly and we have the evidence to support this, tax inquiries take time and in some cases exceed 12-months. Inspectors often work part time; we are always given 30-days to reply and with their case load, a reply can take time.

Like all responsible accountancy firms we provide insurance against the accountant's fee, which due to the time involved our fees, can exceed £1000.

Some clients will have some sort of tax investigation insurance as a bolt-on to another service, e.g. a bank account, business insurance or membership of an organisation. Most of these bolt-on insurance services only cover full inquiries not aspect inquires, which as you have heard is far more likely; you won't know if you are covered until you try to claim or review the policy wording, I urge you to do so.

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Our service also includes a free business legal helpline covering many aspects of commercial law; further details are supplied on the link above.

Our policy runs annually from October 1st to September 30th. If you wish to join part year, a pro-rate fee will apply.

If you have any further questions, please do not hesitate to contact me directly.