Despite a common misconception that the income tax investigation is a random enquiry nearly all Inland Revenue investigations are conducted because HMRC believe that there is something wrong with your tax affairs.
The process of selecting a case for an Inland Revenue Investigation is quite intense. HMRC have access to information from a number of sources, including banks, local authorities, newspapers, Yellow pages, local directories and of course the internet.
This sort of information will be gathered and stored. The advent of the computerised self assessment method of taxation launched in 1997 means that HMRC have information on their computer system relating to your business on a year on year basis and they are also (due to the trade classification codes that are allocated in every instance) able to compare not only your businesses year on year results but with those in your local area who operate in the same field of business.
In addition the encouragement of informants over the last few years has given HMRC an additional seam of information.
All of these factors are looked at and if HMRC hold some (supposedly) hard information from an informant and there are unexplained differences between your business and that of your local competitors then the likely hood of a full blown Inland Revenue Investigation increases.
This is not to say that the information that HMRC have is correct or that there assumptions are correct it is just to say that they believe that there is the distinct possibility that the accounts and tax returns are incorrect.
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