First off, if you are doing your best to be honest and open in your business affairs then there's a good chance that a tax audit will do you no harm. It is estimated that about 50% of all HMRC investigations lead to zero additional charges, so hopefully this will be the case with your company. However, follow this advice to improve your chances.
Inform your advisor
If you receive a letter from HMRC informing you that it intends to investigate your business then you should get professional help. It is likely the taxman will request records but before you send them anything get advice.
Keep good records
You'll probably be asked to supply detailed records which can include books, records, invoices, export documentation, vouchers, till rolls and receipts as well as personal bank and credit card statements. It is advisable that these are well organised and easily accessible. Complete and straightforward records can make all the difference in determining the outcome of an investigation.
Consider fee protection insurance
This is insurance which will cover you for professional fees if you are involved in a dispute with the authorities. Costs can run high as investigations can go on for months or even years. Appeals will lengthen the process.
Know the costs
The maximum adjustment for VAT or tax due is 100%, plus 100% in penalties and interest. Penalties can be reduced by good co-operation. And where fraud or negligence can be proven, any professional fees in dealing with the investigation are not tax deductible.
The investigation process, and the time it takes, depends on the extent of the investigation. For VAT investigations, there will normally be an initial visit by an inspector who will meet with you to discuss your business and ask to look through your records. The inspector then has up to one year to present their assessment. Asking for a reconsideration of the assessment can take another three or four months and if a formal appeal is requested in the courts, this can take up to another year. It's worth requesting a reconsideration as 40% of these are accepted, according to the National Audit Office, but HMRC win a very high percentage of court appeals.