HMRC data matching
HMRC’s focus on making the tax system more efficient has not been confined to changing how tax is reported. Data is now handled differently too, with automated systems and digital records replacing manual checks and paper records. This process – known as HMRC data matching – has been significant in reshaping how taxpayers interact with the tax authority.
HMRC data matching is intended to make things easier. The good news is that if your tax returns are correct, HMRC can maintain an accurate picture of your business and personal finances, meaning there’s less chance of you facing an investigation. However, sometimes the system misinterprets data with frustrating consequences. For small businesses that face irregular payments, seasonal fluctuations, one-off loan requirements and more, a misinterpretation of data can have a significant impact.
Here, we explore what HMRC data matching can do and what it means for small businesses.
What can HMRC data matching do?
HMRC’s information arrives as structured data rather than live feeds, and is compared with what taxpayers and businesses have declared in their returns by data matching and risk analysis tools. It draws on data from the following:
- Banks and building societies, such as interest on savings and other account information
- Pension providers and investment firms
- Employers’ PAYE and RTI payroll submissions
- Digital platforms (such as Etsy and eBay) that must report sellers’ income over a certain threshold
- Overseas tax authorities under international data-sharing agreements
It’s important to note that data from your cloud accounting system is not shared; nor are internal notes, invoice attachments and draft entries. When the numbers broadly line up, nothing happens. When they don’t, automated actions are triggered or the system flags cases that need further attention.
What does HMRC data matching mean for small businesses?
Unfortunately for many small businesses, legitimate irregular financial movements – such as a one-off grant, a directors’ loan repayment or a large purchase – can look anomalous when compared with data from previous years. This means the data matching system can struggle to interpret them.
Secondly, use of third-party data means patterns can be identified before they appear on your tax return triggering a mismatch. If this is not checked over by a human, an automated action may be triggered that results in a penalty, enquiry letter or new tax code being issued.
How to limit the chance of a misinterpretation by HMRC data matching
Luckily, with small changes to how you manage your finances, your business can reduce the risk of misinterpretations by HMRC data matching. For example, you can:
- Keep personal and business finances separate by using a business bank account
- Maintain clear, timely record keeping in your accounting software
- Document one-off grants, asset sales, director loans etc. carefully
- Label major refunds clearly in your accounts
- Get the help of an accountant who can advise on best practices and how to handle irregular payments
How an accountant can help
A professional accountant can offer added peace of mind when dealing with HMRC. They can review your financial records, assist with tax returns, help with interpreting coding changes, and offer support if an action is triggered by the data matching system. Speak to a reputable provider today to find out more.
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