How to prepare for a tax audit before the notice arrives

A tax audit is rarely a surprise to the businesses that handle it well. They are not necessarily more compliant than everyone else. They simply keep their records in a state where an enquiry is an inconvenience rather than a crisis.

Why audits start

Tax authorities increasingly compare what a taxpayer reports with what they can see from other sources. Common triggers include returns that do not agree with each other (for example, turnover declared for VAT that differs from income declared for income tax), figures that do not match third-party or electronic invoice data, repeated refund claims, late or nil returns, and reviews of particular sectors. An audit does not mean anything is wrong, but a mismatch you cannot explain will turn a routine query into a long one.

Put the records in shape now

Do this work on your own schedule rather than against a deadline. At a minimum:

• Reconcile the general ledger to the returns filed, period by period, and keep the reconciliation.
• Reconcile VAT returns to the turnover in your income tax return, and explain any difference in writing.
• Reconcile payroll to PAYE and other statutory deductions.
• Keep valid supporting documents for expenses, in the name of the business, and an up-to-date fixed asset register that supports capital allowances.
• Document related-party transactions and keep the agreements behind them. Unusual transactions need a contract or a short memo explaining the commercial reason.

When the notice arrives

The first response matters more than people expect.

• Read the notice carefully: what is the scope, which periods, and by when is a response required?
• Acknowledge it in writing and name one person as the point of contact.
• Provide what is asked for, in an organized way, and keep a log of everything you submit and when.
• Do not volunteer unrelated material, and do not guess. If a point is contentious, take advice before you answer it.

If an assessment is raised

If you disagree with an assessment, the window to object is short, so confirm the current deadline immediately. A good objection is specific: it identifies each point in dispute and attaches the evidence for it. Amounts that are not in dispute are generally payable in the meantime. Where an objection does not resolve the matter, alternative dispute resolution can be a quicker route than the Tax Appeals Tribunal and the courts, and is worth considering early.

The longer view

The best audit preparation is tax planning that is part of how the business operates, with records kept as transactions happen rather than reconstructed afterwards. An annual review of your returns against your financial records, before submission, catches most of the issues an audit would find.

This article is general information, not tax advice. Rules and deadlines change, so confirm the current requirements for your situation.