Risks to a Business: Failing an HMRC Investigation

Running a successful business is a complex journey filled with triumphs and challenges. Among the many hurdles a business may face, an investigation by HMRC can be one of the most daunting and disruptive experiences.

In this blog, we will delve into the risks a business faces when failing an HMRC investigation and explore the potential consequences for those involved.

    1. Financial Penalties

One of the most immediate risks a business faces during an HMRC investigation is the potential for financial penalties. If the investigation reveals inaccuracies, omissions, or non-compliance, HMRC can impose significant fines. These fines can range from a percentage of the unpaid tax to substantial monetary penalties, depending on the severity and duration of the non-compliance.

    2. Reputational Damage

A failed HMRC investigation can deal a significant blow to a business’s reputation. News of the investigation and any subsequent findings can spread quickly, potentially tarnishing the company’s image in the eyes of customers, suppliers, and stakeholders. Rebuilding trust after such an event may prove challenging and may lead to a loss of business opportunities and partnerships.

    3. Increased Scrutiny

After failing an HMRC investigation, the business may face heightened scrutiny from tax authorities in subsequent years. HMRC may subject the company to more frequent and comprehensive tax audits, causing increased stress and administrative burdens. This continuous scrutiny may negatively impact the morale of employees and management alike.

    4. Loss of Contracts and Funding

For businesses that rely on contracts with government entities or other businesses, a failed HMRC investigation can result in the loss of lucrative contracts. Potential clients may shy away from associating with a company facing tax compliance issues, fearing financial or reputational risks. Additionally, lenders and investors may be hesitant to provide funding or credit to a business under investigation, jeopardising its financial stability.

    5. Business Closure

In the most severe cases, a failed HMRC investigation can lead to the closure of the business. Prolonged investigations, unmanageable fines, and legal fees can overwhelm the company’s financial resources, leaving no choice but to shut down operations. The closure of the business can result in the loss of jobs for employees and significant financial losses for stakeholders.

Facing an HMRC investigation is a challenging experience for any business. The risks of failing such an investigation can be catastrophic, ranging from financial penalties and reputational damage to potential legal consequences and business closures. To mitigate these risks, businesses must prioritise tax compliance, maintain accurate financial records, and seek professional advice to ensure adherence to tax regulations. By being proactive and transparent in tax matters, businesses can protect themselves from the perils of an HMRC investigation and focus on sustainable growth and success in the long run.

Managing IR35 internally can be quite challenging, particularly if the business lacks the necessary in-house knowledge and expertise. It’s not a task that just anyone can handle, as HMRC emphasises that the individual responsible for IR35 compliance must have a comprehensive understanding of the legislation. Careless handling of IR35 can put the business at risk of non-compliance and potential financial penalties. Moreover, the designated person must be well-informed because, in the event of an investigation, they will be leading the response. HMRC does not accept vague answers like “I’m not sure” or “I’ll find out later,” making it crucial for businesses to have a knowledgeable and capable individual managing their IR35 responsibilities to navigate the complexities of the regulations effectively.

Brookson can support you!

Partnering with a specialist like Brookson provides you with security and access to the knowledge you need. We take the responsibility of ensuring all your audits are completed accurately and with reasonable care. Our team ensures that all information is well-documented, giving you peace of mind regarding compliance. In the event of any investigation, we will be there to provide the necessary support, making sure you have expert guidance every step of the way. With Brookson, you can confidently navigate IR35 and focus on your core business knowing that your compliance matters are in capable hands.