What is a 'Tax Audit'?

A 'Tax Audit' is fundamentally a review conducted by HM Revenue and Customs (HMRC) where an entity's tax returns and financial statements are thoroughly examined. This process aims to verify the accuracy and completeness of the information reported by the business in its tax filings. By assessing these documents, HMRC can ensure compliance with tax laws and regulations, identifying any discrepancies or potential understatements of tax liability.

The importance of a tax audit lies in its role in maintaining the integrity of the tax system and ensuring that businesses pay the correct amount of tax based on their reported income and expenses. The audit can focus on various aspects, including income, allowable deductions, and compliance with tax regulations.

The other options do not accurately describe what a tax audit entails. Evaluating a business's market strategy does not fall within the scope of tax audits, which specifically focus on financial and tax reporting rather than strategic business assessments. Determining eligibility for tax credits is a different process and relates more to qualifying for specific benefits rather than reviewing past financial performances. Lastly, while filing annual tax returns is part of tax compliance, it does not involve the scrutiny of existing returns by the tax authority, which is the essence of a tax audit.