HM Revenue and Customs (HMRC) can get in touch with you at any point for a tax compliance check. And while it’s not necessarily anything to worry about, the best thing you can do is to be prepared so that it goes as smoothly as possible. 

To help you stay compliant, this guide will cover everything you need to know about a tax compliance check, including:

  • What is a tax compliance check?
  • What happens during a tax compliance check?
  • What happens after a tax compliance check?
  • What triggers a tax compliance check?
  • How can I ensure my small business is compliant?

What is a tax compliance check?

HMRC is constantly on the lookout for any foul play when it comes to taxes. Whether it’s deliberate tax evasion or just a simple mistake, it’s their job to follow up on any suspicious activity to ensure everybody pays their fair share of tax. 

In recent years, they’ve been increasing their efforts regarding tax compliance. IR35 legislation, for example, was an initiative introduced to try and stop a legal tax loophole that allowed company owners to avoid a certain amount of tax by employing themselves as a contractor. 

Really, it’s for businesses that are deliberately trying to cheat the system. That said, they may perform a check at any time, so here’s what you can expect. 

To initiate a tax compliance check, HMRC will contact you via phone or letter and tell you they want to check any of the following things: 

  • Any taxes you pay.
  • Accounts and tax calculations.
  • Your Self Assessment tax return.
  • Your Company Tax Return.
  • PAYE records and returns (If you have any employees).

If you have an accountant, HMRC will usually contact them first. After the initial call, you have several rights that you should know about. Specifically, you have:

  • The right to be represented.
  • The right to consult an advisor. 
  • The right to confidentiality in all your dealings with HMRC. 
  • The right to complain if you feel you’re being mistreated.

Legally, you have no obligation to respond or help HMRC with their check, but it’s probably best that you’re as helpful as possible – it will make them look at you more favourably if they do find anything wrong with your taxes. 

What happens during a tax compliance check?

During a tax compliance check, HMRC can visit your home, business, or your advisor’s office, or they might ask you to visit them. You can bring an accountant or legal advisor with you for any of the meetings. 

If you ignore an inspection notice or information request, you might be penalised unless you have a reasonable excuse. A reasonable excuse would be something unavoidable that prevents you from responding, such as:

  • If you’re seriously ill.
  • If somebody close to you has died.

If, for any reason, you believe HMRC should stop the check, reply directly to the office that sent you the initial letter and give them your reasons. You may also apply for an alternative dispute resolution if you disagree with HMRC’s decision to perform a check or if you disagree with what they’re checking. 

What happens after a tax compliance check?

After completing the check, HMRC will contact you to tell you the results. If they find something wrong, then several things may happen:

  • If you’ve paid too much tax, then you’ll be repaid – you might even get interest on the amount. 
  • If you’ve paid too little tax, then you’ll be asked to pay the difference within 30 days – you’ll probably have to pay interest from the date it was first due. 

Depending on the circumstances, HMRC might also give you a penalty. The decision depends on a few factors, such as:

  • The reason you paid too little, or too much, tax. 
  • How quickly you told HMRC about the mistake. 
  • How helpful you’ve been throughout the check. 

If you disagree with their decision, you are allowed to make an appeal. 

What triggers a tax compliance check?

HMRC have been known to do random spot checks for tax compliance, but they usually do it for a specific reason. 

Mistakes in your tax return

Mistakes are easy to make, especially when it comes to filing a self-assessment tax return, so this is the most likely reason HMRC will want to do a check. 

Unusual fluctuation in your earnings

A sudden increase in your income from the previous year could be a sign of criminal activity, like money laundering, so it’s a fairly standard thing for HMRC to investigate. Unfortunately, fluctuations are also common with small businesses because of peaks and troughs, so your normal activity may well trigger a tax compliance check.

A tip-off

HMRC takes tax fraud very seriously, and they make it very easy for people to report suspicious activity. It’s only really a problem if you are doing something deliberately illegal. That said, it’s always a good idea to keep your financial activity between people you trust. 

How can I ensure my small business is compliant?

The best way to survive a tax compliance check is by:

  • Being cooperative with HMRC. 
  • Having detailed financial records of all your income and outgoings. 
  • Paying and declaring the correct amount of profits & tax in the first place.

Fortunately, you can achieve all three of these things with the help of the Countingup business current account. 

Stay compliant with Countingup

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place, making it the perfect account to deal with HMRC tax compliance checks. 

Keep a detailed digital record of all your income and expenses, so reporting your financial data is easy and accurate. Receive live tax estimates based on your earnings, and organise all your business expenses into HMRC approved categories, so you’ll always pay the right amount of tax.

Countingup is also MTD (Making Tax Digital) compatible, allowing you to pay and submit VAT data (Value Added Tax) straight from the Countingup systems, so you never miss a filing or payment deadline. You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags, or inaccuracies. 

With all these features in the palm of your hand, you’ll never have to worry about paying the wrong amount of tax, and you’ll have all the information you need if HMRC comes knocking.  

Start your three-month free trial today. 
Find out more here.

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