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An introduction to paperless tax inspections

Over the past few years, HMRC has been slowly transforming the UK’s taxation system to one fit for the 21st century; enter the Making Tax Digital (MTD) initiative.

But while the MTD represents a more streamlined approach than before, there’s no doubt that, simultaneously, HMRC has increased the number of compliance inspections it undertakes year on year.

Advancements in technology and regulations have empowered the department, giving it the means to carry out comprehensive tax inspections in a more streamlined and real-time manner.

To discover how to streamline your own preparation for a tax inspection, click here.

Tax inspections can be instigated for any number of reasons, including, but not limited to:

Mistakes and late tax submissions, income and expenditure inconsistencies, unexpected cash trades, a sudden loss of profit and much more.

But what’s important is whether or not businesses and accountants are prepared.

Being prepared for an HMRC inspection at all times

Those who have made the necessary preparations for the digital tax processes of the future – transitioning to a digital tax system along with record keeping software – will be in a strong position should HMRC come knocking. However, for those businesses and accountants still reliant on paper documentation and physical records, the new inspections could prove troublesome.

It’s important to appreciate the fact that HMRC could ask to investigate business records at any time. Businesses with digital tax and record keeping software can readily provide all information HMRC needs, speeding up the investigation significantly. Rapid response, with all the information requested, will increase the chances of a swift resolution.

Producing accurate data

Also, those with digital tax and record keeping software can provide an HMRC inspector with forensically accurate data, as well as provide contextual information up front, minimising requests for further information.

However, businesses without that software will have to find the necessary documents manually, and depending on the scope and scale of the investigation, this could mean hours – perhaps even days – of sifting through paper documentation to find specific information. Furthermore, once that documentation is found, it still needs to be assessed by HMRC. The inspector will be looking for context in relation to the tax documentation, so accountants and businesses will have to provide every piece of information relevant to the investigation and be prepared to talk the inspector through it.

Impact on ‘business as usual’

Worse still, if a full investigation is required and a business is still using paper documentation, undoubtedly all hands will be on deck, as employees rush around opening file cabinets and frantically trying to pair documents.

With all the business’ resource being redirected to locating documents, the business’ activity will be severely hit. Instead of continuing operations, employees will be trying to locate critical tax information – and without the means to share data in real-time, they will be back and forth.

Clearly, there are a number of problems with the traditional paper-based model and as the UK moves to a digital taxation system, businesses must look to incorporating digital record keeping software to ensure they can meet HMRC demands.

Therefore, to highlight the benefits of a paperless audit system, we’ve developed our eBook, ‘How a paperless system can help with a tax inspection’, addressing the importance of transitioning over to a paperless tax system – and how it can help businesses and accountants to not only meet tax requirements, but also become more efficient.

If you’re thinking of going paperless and want to enhance your business’ tax processes, download our free eBook.

If you're ready to make the transition over to a paperless tax auditing system to speed up your audit process, then watch our AuditAdvanced video here and discover why our AuditAdvanced product is the next generation of audit software.