Tax audit or books investigation: what to expect and how to prepare

How a books investigation starts

A books investigation is almost always announced in writing or by phone. The announcement states which taxes are being checked, for example VAT or income tax, which years are covered, and whether it concerns your entire return or specific elements such as mileage records or input VAT. Sometimes it stays limited to a request to send in documents; sometimes the auditor visits your business address or your bookkeeper. The trigger can be anything: striking fluctuations in your figures, a sector receiving extra attention, a tip-off, or simply a random sample.

What the inspector looks at

The core of every investigation: do your records match your returns, and are the records themselves reliable? Concretely, the auditor looks at the completeness of your revenue (invoices, bank statements, cash records), the business nature of your costs (invoices and receipts, mixed costs, private use), the VAT (correct rates, rightly claimed input tax, reverse-charge schemes) and specific deductions such as the self-employed deduction, for which your time records are the evidence.

In sectors with a lot of cash, the emphasis is on cash records and the match between diary, till and bank. For service providers, it is more often about time records, the business nature of costs and VAT on foreign transactions.

Your obligations: cooperate and retain

As an entrepreneur you have a statutory duty to provide information: you must supply the data and details that may be relevant to your taxation, and give the auditor access to your records. Those records must be kept for seven years, ten for immovable property. If your records fall short, or you refuse to cooperate, the tax authorities can reverse and increase the burden of proof: the inspector then makes a reasonable estimate and you must convincingly demonstrate it is too high. You want to avoid that position at all costs.

In return, the auditor must work diligently, record findings in an audit report, and you are entitled to a closing meeting in which you can respond to the findings before any assessments follow.

How to prepare

Read the announcement carefully: which tax, which years, which elements. Have the requested documents complete and organised: invoices, bank statements, cash book, contracts, time records and mileage logs. Critically review the years in question yourself in advance, or have your bookkeeper do so. If you find an error yourself, it is often wise to report or correct it proactively via a supplementary return; that counts in the assessment and can limit a penalty.

Have your bookkeeper or adviser assist you during the investigation. Answer questions factually and completely, but do not speculate or guess: 'I will look that up and get back to you' is a perfectly good answer. Take your own notes of what was discussed and which documents were handed over.

And afterwards?

Afterwards you receive the audit report. If everything is approved, you are done and you also know your records pass the test. If there are corrections, additional assessments follow, possibly with tax interest and a penalty where there is culpability. You can object to those assessments within six weeks. The best insurance against all of this remains an administration that is maintained continuously rather than reconstructed afterwards: then a books investigation is mostly a formality.