HMRC Tax Investigation: Everything You Need to Know

Taxes are an inevitable part of life, but they can be confusing and easy to get wrong. There are also multiple ways to deliberately avoid taxes, which, if illegal, is treated as criminal tax avoidance.  

HMRC (Her Majesty’s Revenue and Customs) has the right to instigate a tax investigation on any businesses or individuals, either as a random audit check or to evaluate suspected inconsistencies in your reporting.

Today we’ll help you prepare for the possibility of a tax investigation by looking at: 

• What is an HMRC tax investigation?
• What happens during a tax investigation?
• When does HMRC tend to launch tax audits?
• What are the possible outcomes of an HMRC tax investigation?
• How do I appeal the result of a tax investigation?

A tax investigation or tax compliance check means that HMRC wants to review your records and ensure you are paying the right amount of tax. 

Investigations can happen to individual taxpayers or business entities. 

HMRC will get in touch via phone or post to specify the reason and scope of the check and may ask to inspect records relating to:

• The taxes you pay
• Accounts and tax calculations
• Self-assessment tax returns
• Corporation tax returns
• PAYE employment records and returns

If you have an accountant, HMRC may contact them directly and usually looks to verify whether you are paying correct taxes on time, receiving the appropriate allowances and tax reliefs, or attempting to evade tax responsibilities. 

There are three types of HMRC tax enquiry, which we’ll explain below.

A full enquiry indicates that HMRC perceives a significant risk of errors on your tax returns. 

The audit will include a review of all records, potentially including the personal financial records of the directors and business owners. 

Aspect enquiries focus on a specific area of your accounts and constitute a request for more detail.

Generally, the outcome highlights a mistake or misunderstanding rather than a deliberate attempt to evade tax. Still, aspect enquiries should be treated just as seriously as a full investigation.

Sometimes HMRC investigates businesses selected at random or according to strategies to target certain business sectors. 

HMRC may request a visit to your home, office, business premises or accountant’s offices or can ask for you to attend a meeting in a local tax office. 

You may bring a legal adviser or accountant to any such discussions. 

While you have the right to schedule these meetings at a convenient time, HMRC can issue a penalty if you ignore a notice or refuse a visit. 

Accepted reasons to defer or postpone a meeting include serious illness or bereavement of a close family member. 

Normally, a tax investigation will happen when something doesn’t add up. 

For example, if a small business makes a substantial VAT claim or a large company declares a tiny tax obligation, HMRC will flag this as unusual and investigate. 

Specific reasons for new investigations include:

• Tip-offs made to HMRC
• Operating in high-risk industries, such as receiving large cash payments
• A sudden decrease in income, costs, or inconsistencies between returns
• Regularly late tax returns
• Business expenses that are higher than the industry average
• A living standard that isn’t reflected in your tax returns
• Trading in a sector that HMRC has selected for assessment

More often than not, an audit occurs because of a routine check or an unintentional error on a return, so an investigation isn’t necessarily a severe problem if you have acted in good faith and believe that your submissions are accurate.

Depending on the information uncovered during the investigation, several things may happen, including:

• Receipt of repayment if you have overpaid taxes
• A request to remit additional tax liabilities within 30 days
• Charges for interest on unpaid tax backdated to the original due date

If you are non-compliant, HMRC can also levy penalties, although this will depend on:

• Reasons why you underpaid or over-claimed taxes
• Whether you advised HMRC as quickly as possible
• The level of support provided by your business during the investigation

Should HMRC discover an issue but believe this is a genuine mistake, the auditor will assess this and the cooperation shown before deciding. 

However, if the tax office believes there is evidence of fraud, it may launch a criminal investigation. Click here to find out more about HMRC’s criminal investigation policy.

You can appeal a decision if you disagree with the results of a tax investigation or feel that the auditor has missed something fundamental in their enquiries.

If you wish to use the appeal process, you’ll need to provide detailed records of all relevant financial information to support the justification for the appeal process and evidence of why the tax office has made a mistake. 

You can also apply for alternative dispute resolution (ADR) at any point if you disagree with the rationale behind any penalties imposed following a tax investigation. 

Mitigating circumstances, such as a serious illness or the death of a loved one, may be viable reasons to explain why a tax submission or payment is late. Still, it is crucial to contact HMRC to explain – they will usually consider these factors. 

The best way to stay ahead of HMRC is to leverage the power of Countingup’s business current account.

This small business current account is a hybrid accountancy software and banking solution, all available through an intuitive mobile app that keeps diligent records of all income and expenses.

Storing these transactions and having readily available records to evidence your business operations is key and often means that any tentative tax investigation is resolved quickly, fairly, and with no negative outcomes.

New business accounts take just a few minutes to register – find out more here and try it for free.