As a small business owner, navigating HMRC’s processes can feel daunting, and automated checks add another layer to think about. Understanding how these checks work, what triggers them, and how to avoid unnecessary scrutiny is really important as it can save you time, effort, and stress.
So, what should small business owners know about HMRC automated checks?
How do HMRC automated checks work?
HMRC uses sophisticated software to flag potential anomalies in tax submissions. These automated checks are designed to ensure compliance and identify discrepancies without human intervention. The system compares your current submissions with historical data and industry benchmarks. For instance, a sudden spike in expenses or an unexpected VAT refund might stand out.
HMRC’s system doesn’t target individuals or businesses unfairly; it’s simply looking for patterns that deviate from the norm. If flagged, your case is typically referred to a human officer for further review. It’s important to keep in mind that being flagged doesn’t automatically mean you’ve done something wrong. It’s just HMRC’s way of ensuring everything adds up!
What are common triggers for automated checks?
Unusual VAT refunds
If your business doesn’t typically claim VAT refunds and suddenly submits a claim — especially a large one — this could trigger an automated check. Small refunds in the hundreds of pounds might pass unnoticed, but larger amounts in the thousands often warrant a closer look.
Drastic year-over-year changes
Significant shifts in your financial data, such as a sharp increase in expenses or a drop in revenue, can also catch HMRC’s attention. For instance, if your travel expenses triple in a year without an obvious reason, the system might flag this as unusual.
General expense categories
Broad expense categories like “repairs,” “travel,” or “sundries” are frequently scrutinised as HMRC wants to ensure these categories are not being used to lump unrelated or exaggerated costs together.
Employment expenses
Claiming high employment expenses, such as doctor’s fees, that don’t align with your industry or job description can also raise questions. For example, if you’re a small business owner claiming significant medical expenses without evidence of a relevant role, it might trigger a review.
What to expect if flagged by HMRC
If your submission is flagged, HMRC will typically send an automated letter requesting additional documentation. This process can usually be handled online, making it relatively straightforward. The documents you may need to provide include:
VAT detail report: A breakdown of your VAT calculations.
Bank statements: To verify income and expenses.
Highest purchase and sales invoices: Usually the five largest transactions in each category.
Once you’ve submitted the requested documents, a human officer will review your case. This additional layer ensures accuracy and fairness while avoiding unnecessary escalation.
How to avoid automated HMRC checks
Be detailed with expense categories
Make sure that you avoid using broad expense categories like “repairs” or “sundries.” Instead, break them down into more specific subcategories. For example, instead of listing “repairs,” specify “plumbing repairs” or “equipment maintenance.” This level of detail reduces ambiguity and helps HMRC’s system better understand your data.
Monitor VAT refund patterns
If you’re claiming a VAT refund and it’s larger than usual, double-check your calculations before submitting. Ensure you have all the supporting documentation ready in case of a query.
Analyse year-over-year changes
Before submitting your return, compare your figures with previous years. If you spot significant changes, include explanations in your submission. For example, if travel expenses increased because of a new client or expansion, provide context.
Work with a professional
Hiring an accountant or tax advisor who understands HMRC’s processes can help you stay compliant. They can review your submissions, flag potential issues, and provide guidance on best practices.
Need some extra help making sure that your small business is HMRC compliant? Contact us today, we’d love to help.
