Funny how an innocent looking envelope can turn you into a trembling, nervous mess – perhaps worse than your most nervous patient, when it has an Inland Revenue postmark on it.

Once your hands have stopped shaking enough to open it, you read that the HM Inspector of taxes is going to investigate into your tax return. You feel as though life as you know it has ended. Distant memories of those nice neighbours that used to live on your street before they had their tax return investigated and had to sell the house to pay a huge tax bill return to haunt you. What mental asylum are they at now anyway?

What is an enquiry? Why you? How will it affect you? And more importantly what do you do about it?

Let’s consider each one in turn.

This is where they look into your tax return to check that everything that should be declared is declared – nothing more, nothing less. For self-employed people, in relation to their business activities, they will be looking at three main areas:

1. Do your accounts reflect all your income?
2. Do your accounts show genuine business expenses?
3. Are you able to explain your lifestyle?

Of course, this is just a broad outline.

It may be that something in your tax return stood out – for example if your profits had dropped/increased a lot. Or perhaps your expense ratios differed significantly from other taxpayers in a similar situation.

Alternatively it may just be that you are one of the lucky people chosen at random to be closely scrutinized by the Inland Revenue.

A third type is where the Inland Revenue show an interest in one aspect of your tax return, for example your investment income. If queries raised are not answered well, they may open up the enquiry to a full scale one.

You will need to be providing information to either your accountant (if they are dealing with it) or the Inland Revenue (if you are brave enough to be dealing with it yourself).

It is not unknown for enquiries to span two years. You just have to be patient. At the end of the enquiry, there may be an adjustment required to your tax payment. This could mean that you owe extra tax, and this adjustment may also incorporate penalties and interest. The adjustment rarely results in a repayment of tax! However, we have known a number of cases where no adjustment was made at all, and some where a very nominal adjustment was made. It really is important that you have teamed up with your accountant to follow a suitable accounting system and have retained required records.

The important thing to remember is that if you haven’t done anything wrong, they can’t "do you" for anything. So don’t panic!

If you have an accountant, they should have received the letter in full and you would have received a letter telling you that the Inland Revenue intends to look into your return and that they have written to your accountant about this. If your accountant is going to be handling the enquiry for you, all you need to do is to reply to their letters – NEVER COMMUNICATE DIRECTLY WITH THE INSPECTOR IF YOUR ACCOUNTANT IS DEALING WITH IT FOR YOU, UNLESS YOUR ACCOUNTANT TELLS YOU OTHERWISE. Another point to bear in mind is to check whether you have investigation cover with your accountant. This, subject to terms, usually means that the costs of dealing with the enquiry will be covered by the insurance policy. In the absence of such a policy, you may find yourself having to fork out up to £15,000 to cover the cost of your accountant dealing with the enquiry. We’re not talking peanuts here!

If you have not instructed an accountant, or you do have one but they will not be dealing with the enquiry, you will have to respond in full to letters from the Inspector. This will mainly be requests for information and/or clarification.

Whichever route you follow, you may find the Inspector wants to have a meeting with you. Meetings with the Inspector are best avoided but, of course, this depends from case to case.

If a meeting is unavoidable, it can be agreed to near the end of the investigation rather than at the beginning.

In some cases, yes. If your accountant is a specialist, he/she will ensure that any unusual matters are communicated by drafting a note on your tax return. If the Inspector is then satisfied that any unusual matters are explained, he/she may choose not to look into your return, even if that unusual matter had initially drawn their attention. In a number of cases however, there is nothing you can do to prevent investigations – it’s just a matter of (bad) luck!

A tax enquiry is a little like a heart attack. Everything’s going ok, then suddenly it creeps up on you threatening to turn your whole world upside down. Unlike a heart attack, where in many cases you can take preventive measures by exercising and eating healthily etc., there is little you can do to prevent an enquiry.

However, you can certainly ensure that you are prepared for one, in which case you can give the Inspectors a run for their money, (and hopefully not part with any of yours!).

What you can do:

1. Check your accountant has an Investigation Cover insurance policy and ensure that you meet all the requirements to be covered.
2. Organize your procedures in a manner that helps you (with your accountant’s help) in case you have an investigation. Retain relevant records for up to 9 years.
3. Try not to worry. If anything does concern you, speak to your accountant who should be able to put your mind at rest.

Mac Kotecha (FCA) is a Chartered Accountant who deals exclusively with dentists and has been established for over 25 years. His company offers Accountancy, Taxation & Payroll services in addition to invaluable advice on practice management, buying/setting up a practice and other dental issues.