The way risk assessment works is company tax and VAT returns are run through a computer to be benchmarked against other companies in the same industry and against the performance of the economy as a whole. A company's returns can also be compared with previous years. Any anomalies or fluctuations which are discovered are likely to put a company directly under the tax spotlight-especially if these are not explained. Take VAT forms, for instance. According to Glyn Edwards, Senior VAT Consultant at IRPC Taxation Services, the computer looks at such things as the relationship between the value of a company's sales and purchases, which is then compared with all other companies in the same trade class. If you're significantly different, you're likely to get targeted for an inquiry. You can also be targeted if there's a sudden change in VAT on sales. “If you're somebody who always declares 17.5% and it suddenly shifts to lower than that, Customs is going to think, hey wait a minute, maybe something's changed or there's an error,” Edwards explains. And woe betide anyone who claims net VAT payable. “That will make them throw a wobbly,” he says. On tax returns, risk assessment looks at how a company is performing against what would be expected in their industry-for example, percentages for gross profit, turnover growth and net profit. The software will also be checking for any year-on-year fluctuations in turnover, profits, debtors or stock. If this is happening to your business you should always use the space on the return to explain why, advises John Baldwin, Managing Tax Consultant with IRPC. “When I was in Revenue I had a trolley full of files to pick for investigation. Anything with fluctuations not explained, I'd put into a separate file and they always got a second look,” he says. Sector specific Companies are more at risk from an investigation in industries where fraud is common or where complex legislation makes compliance mistakes more likely. According to Irit Zerzenshtein, VAT Partner at PKF, companies at highest risk from a VAT inquiry are in construction, mobile phones and computers, retail and other cash businesses and export. Businesses which are partially VAT exempt are also at high risk. The FSB's Neil Hamper believes that it's mistakes in meeting payroll requirements that set off the most Inland Revenue inquiries, especially for smaller companies. “The more rules that are put in place, the more pitfalls for the unwary,” he says. You are also at higher risk of an Inland Revenue inquiry if you are a fast growing, entrepreneurial business, according to Chris Oates, National Director of Tax Risk Management at Ernst & Young. “We call these 'gazelle companies,'” he says. “They are growing massively but their accounting systems haven't kept pace with that growth and aren't robust enough to capture data properly. The Inland Revenue is very alive to this. They are also aware that entrepreneurial companies, headed by owner managers, are more likely to try and reduce their tax liabilities.”

According to FSB statistics, the Inland Revenue is less likely to carry out a full investigation on large businesses due to the resources required. Most full investigations are on cash businesses with turnovers up to £250,000. “It's very rare to read about a large company having a tax problem because they have a multitude of tax accountants and internal advisors, so they shouldn't be making a mistake,” says John Cassidy, Senior Manager of Tax Investigations at PKF. “But in smaller companies it's the proprietor who's expected to keep pristine records. Mistakes can easily happen.”