HMRC and other tax authorities also use trend analysis to identify potential areas of interest. An unexpected significant increase or decrease in the VAT liability for a reporting period, or a business requesting a repayment when it is normally in a payable position, will probably lead to an audit.
Businesses can also use such tools to predict when an audit is likely and investigate before the tax authority does.
Past compliance also comes into consideration when tax authorities decide to trigger an audit, and how their information ranks against certain risk parameters. Another common reason will be cross checks to verify that information provided is consistent.
Preparation for an audit
When an audit is triggered, the first step to help avoid any unexpected costs from penalties is identifying the reason for the audit. This way businesses will be best placed to understand exactly how to prepare.
A business can look at specific checklists provided by each jurisdiction to prepare for these scenarios, but the best approach is to put technology and processes in place to continuously collect documents and information so they are readily available for these scenarios.
However, it is just as crucial to prepare ahead of time to ensure all information is readily available on demand. Technology is playing a core role by automating many of the processes that would have historically taken place.
Centralising all tax reporting information from multiple data sources into a single database enables organisations to quickly gather all the information required from a tax authority. The information required for an audit can consist of VAT ledgers, incoming and outgoing invoices, proof of transport and payment, supplier contracts and descriptions of business activities and goods flows.
Keeping an extensive record of all of this information will help businesses always be prepared in the event of an audit.
HMRC assesses penalties depending on whether an error is classified as careless, deliberate, or deliberate and concealed.
Another important determination of penalty severity is whether the error was an unprompted disclosure by the taxpayer, or if it was a prompted disclosure in which it was discovered by HMRC. Errors disclosed by the taxpayer will normally receive a lesser penalty than those discovered by HMRC. Taxpayers should always consider performing trend analysis so that they can identify any errors before HMRC does.
By planning ahead and putting the right processes and tools in place, companies can minimise the resources needed to collect all the information required to successfully navigate a tax audit. However, avoiding these scenarios altogether relies on a deep understanding of local tax legislation and reporting processes. So, in the wake of the great resignation, when resources are stretched, being able to preserve critical local knowledge will be just as important to navigate complex tax landscape.
