What Happens If HMRC Opens an Investigation?

Receiving a letter from HMRC saying that your business is being investigated can be worrying.

For many business owners, the immediate assumption is that they must have done something wrong. That is not necessarily the case.

HMRC carries out compliance checks to confirm that individuals and businesses have declared and paid the correct amount of tax. Some checks follow a specific risk or inconsistency, while others may form part of wider compliance activity.

The important thing is not to panic or respond hastily.

Understanding what an HMRC investigation involves, what information HMRC can request and how you should respond can make the process considerably more manageable.

This guide explains how HMRC investigations work, why businesses are selected, what may happen during a check and what you should do if HMRC contacts you.

The short answer

An HMRC investigation usually begins with a letter or telephone call explaining what HMRC wants to check.

HMRC may ask for accounting records, tax calculations, invoices, bank statements and explanations of particular transactions. It may also arrange a visit or issue a formal information notice where necessary.

The investigation could end with:

• No changes being required
• An adjustment to a tax return
• Additional tax becoming payable
• Interest being charged
• A financial penalty
• A repayment becoming due
• An appeal or further dispute-resolution process

Receiving an investigation letter does not itself prove that an error, negligence or fraud has occurred.

However, the business should take the correspondence seriously, preserve its records and obtain professional advice before providing substantial information or explanations.

What is an HMRC investigation?

An HMRC investigation is commonly referred to as a compliance check.

It is HMRC’s process for checking whether the information supplied through tax returns, accounts and other submissions is complete and accurate.

Depending on the business and the issue being examined, HMRC may review:

• Self Assessment tax returns
• Company Tax Returns
• Corporation Tax calculations
• VAT returns
• PAYE and National Insurance records
• Construction Industry Scheme records
• Business income
• Business expenses
• Capital allowances
• Dividend payments
• Director’s loan accounts
• Payroll information
• Property income
• Capital gains
• Overseas income or assets

HMRC may also compare the figures submitted with information it already holds from banks, employers, Companies House, overseas tax authorities, online platforms and other third parties.

The purpose is to establish whether the correct amount of tax has been declared and paid.

Does an investigation mean you have done something wrong?

No.

Many people assume that an HMRC investigation means HMRC believes fraud has taken place. Routine compliance checks are not the same as criminal investigations or serious civil fraud investigations.

A check may be opened to:

• Clarify information on a return
• Examine an unusual figure
• Reconcile figures with third-party data
• Review a particular tax treatment
• Check records within a particular sector
• Test whether a business is complying with its obligations
• Investigate a specific risk identified by HMRC
• Conduct random compliance activity

Some investigations conclude without any changes being made.

However, businesses should not treat a compliance check casually. Even where the original return is correct, unclear explanations, missing documents or inconsistent responses can prolong the investigation.

Why does HMRC investigate businesses?

HMRC uses technology, risk analysis, third-party information and human review to identify returns and businesses that may require further examination.

A check might begin because:

• Figures differ significantly from previous years
• Profit margins appear unusual for the industry
• VAT returns contain unexpected repayment claims
• Expenses appear high compared with turnover
• Payroll information does not agree with the accounts
• A company reports repeated losses
• Income reported by a third party does not appear on a return
• Returns are repeatedly submitted late
• Director withdrawals have not been explained properly
• Cash takings appear inconsistent with the business’s activity
• Information provided on different tax returns does not agree
• HMRC receives information from another person or organisation

A risk indicator does not establish that a tax return is incorrect. It may simply mean that HMRC wants an explanation or supporting evidence.

Different types of HMRC investigation

The nature and seriousness of an investigation can vary considerably.

Full or broad enquiry

A broad enquiry examines multiple areas of the taxpayer’s affairs.

For a limited company, HMRC may look at the accounts, Corporation Tax return, income, expenditure, payroll, dividends and director’s loan accounts.

A full enquiry does not necessarily mean HMRC suspects fraud. However, it may involve a substantial review of the business’s records and accounting systems.

Aspect or focused enquiry

A focused enquiry considers a particular figure, transaction or area of a tax return.

Examples include:

• Travel and subsistence expenses
• Repairs and maintenance costs
• Capital allowance claims
• Director’s loan accounts
• Dividend payments
• Rental expenses
• A particular source of income
• The treatment of a large asset purchase

Focused enquiries can sometimes expand if HMRC identifies another material issue while reviewing the records.

VAT compliance check

A VAT check may examine:

• VAT returns
• Sales invoices
• Purchase invoices
• Digital VAT records
• VAT calculations
• Input tax claims
• The VAT treatment of particular sales
• Partial exemption calculations
• Property transactions
• Making Tax Digital compliance

Businesses that need help maintaining VAT records or reviewing their VAT treatment can use Merranti’s VAT services.

PAYE compliance check

Where a business employs staff, HMRC may review:

• Payroll records
• PAYE calculations
• National Insurance
• Benefits and expenses
• Employment status
• Company vehicles
• Payments to directors
• Payments to subcontractors
• Termination payments
• Real Time Information submissions

HMRC may also consider whether individuals treated as self-employed should instead have been treated as employees.

COP8 and COP9 investigations

COP8 and COP9 investigations are more serious than routine compliance checks.

COP8 is generally used for complex cases involving significant tax risk where HMRC has not necessarily alleged fraud at the outset.

COP9 is used where HMRC suspects deliberate tax fraud and offers the taxpayer the opportunity to make a complete disclosure under the Contractual Disclosure Facility.

Anyone receiving correspondence referring to COP8, COP9, the Fraud Investigation Service or the Contractual Disclosure Facility should obtain specialist advice immediately.

Merranti’s guide to HMRC civil tax investigations explains the distinction in more detail.

How will HMRC contact you?

Most compliance checks begin with a letter, although HMRC may sometimes make initial contact by telephone.

The opening correspondence should normally explain:

• Which person or business is being checked
• Which tax is being reviewed
• The period under examination
• The information or documents requested
• The deadline for responding
• The HMRC officer or team handling the case
• How to contact HMRC
• The relevant compliance-check factsheet

Before responding, check that the communication is genuine.

Do not use telephone numbers, email addresses or links from a suspicious message without verifying them independently. If the letter is genuine, provide it to your accountant in full rather than sending only selected pages.

What information can HMRC request?

The records requested will depend on the tax risk being examined.

Common requests include:

• Business bank statements
• Personal bank statements where relevant
• Sales invoices
• Purchase invoices
• Receipts
• Contracts
• Accounting software reports
• Nominal ledgers
• VAT records
• Payroll reports
• Employee expense claims
• CIS records
• Dividend vouchers and board minutes
• Director’s loan account records
• Mileage logs
• Asset purchase documents
• Loan agreements
• Property completion statements
• Evidence supporting particular tax reliefs

HMRC will often begin by requesting information informally.

Where information is not supplied, there is an unreasonable delay or the circumstances justify a formal approach, HMRC may issue an information notice under Schedule 36 of the Finance Act 2008.

A formal notice must identify the information or documents required and allow a reasonable period for the recipient to comply. Some information notices can be appealed, although appeal rights are restricted for statutory records and tribunal-approved notices.

The requested information should be relevant to the tax position under review. This does not mean that a business should refuse reasonable requests, but it should understand the scope and purpose of the request before providing large quantities of unrelated material.

What if your records are incomplete?

Tell your accountant immediately.

Do not create false invoices, alter original records or provide an explanation that you know is inaccurate.

Instead, identify:

• Which records are missing
• Why they are unavailable
• Whether copies can be obtained
• Whether figures can be reconstructed reliably
• What alternative evidence exists
• Whether an earlier return may contain an error

Bank records, supplier statements, customer records, emails and accounting-system backups may help reconstruct missing information.

Merranti’s guide to the records businesses need to keep for HMRC explains the supporting documents that should normally be retained.

How far back can HMRC investigate?

There are two different concepts to consider:

1. The time limit for opening an enquiry into a submitted return
2. The time limit for making an assessment where HMRC later discovers that tax has been underpaid

The ordinary enquiry window depends on the type of return and when it was filed. For many Self Assessment and Company Tax Returns, HMRC will generally have 12 months from the date the return was delivered, although different rules can apply.

Where HMRC discovers an underpayment outside the ordinary enquiry window, assessment periods can commonly extend to:

• Four years in ordinary cases
• Six years where the loss of tax was caused by careless behaviour
• Twenty years where the loss was caused deliberately or certain obligations were not met
• Twelve years for certain offshore Income Tax, Capital Gains Tax and Inheritance Tax matters

These are general limits rather than a complete statement of the law. Different taxes and circumstances can produce different results.

The fact that HMRC asks about an older period does not automatically establish that it has the legal power to issue an assessment. Your accountant should check the relevant time limits and the basis on which HMRC is acting.

How long does an HMRC investigation take?

There is no single standard duration.

A focused enquiry with complete records may be resolved relatively quickly. A broad investigation involving multiple taxes, incomplete records or technical disputes may continue for months or longer.

The duration may depend on:

• The scope of the check
• The quality of the accounting records
• How quickly information is supplied
• Whether responses are complete and consistent
• The complexity of the transactions
• Whether HMRC identifies additional issues
• Whether specialist valuations or technical opinions are needed
• HMRC’s workload
• Whether the parties disagree on the tax treatment

Responding quickly is useful, but speed should not come at the expense of accuracy.

An incomplete or poorly considered response can create additional questions and make the enquiry longer.

What happens during the investigation?

A routine investigation may follow these stages:

1. HMRC opens the compliance check.
2. The business and its adviser review the opening letter.
3. The requested documents are gathered and checked.
4. A written response is prepared.
5. HMRC reviews the information.
6. HMRC asks further questions where necessary.
7. The business provides additional evidence or explanations.
8. Technical or factual disagreements are discussed.
9. HMRC reaches a conclusion.
10. The check is closed or further action is taken.

Your adviser should maintain a clear record of:

• What HMRC requested
• What was supplied
• Explanations provided
• Telephone conversations
• Agreed deadlines
• Outstanding questions
• Potential tax exposure

Can HMRC visit your business?

Yes.

HMRC may ask to visit:

• Your business premises
• Your home, if the business is operated there
• Your accountant’s office
• Another location where records are held

A visit may involve reviewing statutory records, discussing how the accounting system works and inspecting business premises, assets or goods.

Many visits are arranged by agreement. Where HMRC uses formal inspection powers, it will normally provide at least seven days’ notice, although unannounced visits can occur in limited circumstances.

During a formal inspection, HMRC cannot simply search through everything without restriction. Its powers are subject to legal limits, and certain documents are protected.

You can have an accountant or legal adviser present during a visit.

What penalties can apply?

An error does not automatically result in a penalty.

HMRC normally considers the behaviour that caused the inaccuracy.

The main categories are:

• Reasonable care: the taxpayer took reasonable care but an error still occurred
• Careless: the taxpayer failed to take reasonable care
• Deliberate: the taxpayer knowingly submitted inaccurate information
• Deliberate and concealed: the taxpayer knowingly submitted an inaccuracy and took active steps to hide it

Where reasonable care was taken, an inaccuracy penalty should not normally apply.

Where an error was careless or deliberate, the penalty is generally calculated by reference to the potential lost revenue. Deliberate and concealed behaviour can result in the highest penalties.

Interest may also be charged on tax paid late. Interest compensates HMRC for the delay and is separate from any penalty.

Failure to comply with a formal information notice can itself result in penalties, even if the underlying tax return is ultimately found to be correct.

Can penalties be reduced?

Potentially, yes.

The amount of an inaccuracy penalty can be influenced by whether the disclosure was prompted or unprompted and by the quality of the taxpayer’s disclosure.

HMRC considers the extent to which the taxpayer:

• Tells HMRC about the error
• Helps HMRC calculate the correct tax
• Gives HMRC access to appropriate records

A voluntary disclosure made before HMRC identifies the issue will normally receive more favourable treatment than a disclosure made only after a compliance check begins.

Cooperation does not mean agreeing with every HMRC conclusion. A taxpayer can cooperate fully while still challenging an incorrect legal interpretation or unreasonable calculation.

Businesses should be open and accurate, but they should also protect their position and obtain advice before making admissions.

What happens when the investigation ends?

A compliance check may end with HMRC confirming that no changes are needed.

Where HMRC believes an adjustment is required, it may:

• Amend a tax return
• Issue an assessment
• Calculate additional tax
• Charge interest
• Propose a penalty
• Ask the taxpayer to enter into a settlement
• Confirm that a repayment is due

For a formal enquiry into a tax return, HMRC will normally issue a closure notice setting out its conclusions and any amendments.

If you disagree with the decision, you may have the right to:

• Ask HMRC to review it
• Appeal to the First-tier Tribunal
• Consider Alternative Dispute Resolution
• Challenge whether a request or assessment is legally valid

Appeal deadlines can be short. The decision letter should therefore be reviewed as soon as it arrives.

What should you do when HMRC contacts you?

Take the following steps:

1. Confirm that the communication is genuine.
2. Read the complete letter carefully.
3. Record the response deadline.
4. Do not telephone HMRC unprepared.
5. Send the full correspondence to your accountant.
6. Preserve all potentially relevant records.
7. Review the tax returns and accounts under examination.
8. Identify possible errors before responding.
9. Prepare explanations supported by evidence.
10. Keep copies of everything submitted.

Do not ignore the letter, destroy documents or attempt to make the records look more complete than they were at the relevant time.

Merranti’s guide to what to do when HMRC opens an enquiry provides further practical steps for managing the initial response.

Common mistakes during an HMRC investigation

Problems are often made worse by how a business responds rather than by the original issue.

Common mistakes include:

• Ignoring HMRC correspondence
• Missing deadlines without requesting an extension
• Responding without reviewing the underlying records
• Guessing when the correct answer is not known
• Providing inconsistent explanations
• Sending large volumes of unreviewed information
• Withholding relevant documents
• Altering original records
• Making unnecessary admissions
• Speaking to HMRC without understanding the scope of the check
• Assuming the accountant has received the same correspondence
• Failing to challenge an incorrect HMRC conclusion

A controlled, evidence-based response is normally more effective than a rushed or defensive one.

How to prepare before HMRC contacts you

The best preparation is accurate record-keeping throughout the year.

Good practice includes:

• Reconciling bank accounts regularly
• Updating bookkeeping each month
• Keeping digital copies of receipts and invoices
• Reviewing VAT returns before submission
• Maintaining complete payroll records
• Recording business mileage
• Preparing dividend paperwork
• Reviewing director’s loan accounts
• Investigating unusual balances
• Comparing tax returns with the accounting records
• Retaining evidence for significant or unusual transactions

Regular bookkeeping makes it easier to identify errors before a return is submitted.

Financial and management accounts can also help directors identify unexpected margins, unexplained balances or inconsistent results before they become questions raised by HMRC.

Should you reply yourself?

A simple request may appear straightforward, but the implications are not always obvious.

An accountant or tax adviser can:

• Check whether HMRC has opened the enquiry within the correct time limit
• Clarify the scope of the investigation
• Review the information before it is supplied
• Identify errors or inconsistencies
• Prepare a structured response
• Explain the accounting and tax treatment
• Communicate directly with HMRC
• Negotiate additional time where necessary
• Challenge unreasonable requests
• Review proposed tax and penalties
• Submit an appeal where appropriate

Professional involvement is particularly important where the records are incomplete, the potential tax is substantial or HMRC refers to deliberate behaviour.

Can professional costs be covered?

Ordinary accountancy fees do not always include the additional work required to defend an HMRC investigation.

A compliance check can involve substantial time reviewing historic records, preparing correspondence, attending meetings and negotiating with HMRC.

Merranti’s Tax Fee Protection service is designed to protect eligible clients against covered professional costs arising from an HMRC tax or VAT enquiry, subject to the policy’s terms, conditions and exclusions.

Cover generally needs to be in place before the investigation begins.

Frequently asked questions

How common are HMRC investigations?

HMRC regularly carries out compliance checks involving individuals and businesses. The likelihood of a check depends on the taxpayer’s circumstances, sector, submissions and the information available to HMRC.

Do investigations always lead to extra tax?

No.

Some checks conclude without any changes. Others identify a repayment or a relatively minor correction rather than a substantial tax liability.

Can HMRC investigate my bank account?

HMRC can request bank statements and may obtain information from a financial institution where the legal conditions are met.

It does not have unrestricted, continuous access to every taxpayer’s online banking.

Can HMRC investigate old tax returns?

Potentially.

The applicable period depends on the tax, the enquiry rules, the nature of any underpayment and whether the taxpayer’s behaviour was ordinary, careless or deliberate.

Can HMRC turn up without warning?

Unannounced visits are possible in limited circumstances, but many business visits are arranged in advance.

Ask the officers for identification and contact your accountant immediately.

Should I ignore an HMRC letter if I believe my return is correct?

No.

A correct return does not remove the need to respond. Failure to engage can lead to formal information notices, penalties and HMRC making decisions using the information available to it.

Can my accountant deal with HMRC?

Yes.

Once properly authorised, an accountant can correspond with HMRC, prepare responses and represent you during much of the investigation.

Can I appeal HMRC’s decision?

Often, yes.

The appropriate route will depend on the decision. There may be options including an internal review, Alternative Dispute Resolution or an appeal to the First-tier Tribunal.

Final thoughts

An HMRC investigation can be disruptive, but it does not automatically mean your business has done anything wrong.

The key is to respond calmly, promptly and accurately.

Strong bookkeeping, properly prepared tax returns and organised supporting records can significantly reduce the time required to answer HMRC’s questions. Where an error has occurred, early professional advice can also help the business correct the position and manage potential interest and penalties appropriately.

If you have received an HMRC enquiry, Merranti Accounting can help you:

• Review HMRC’s opening letter
• Confirm what information is being requested
• Examine the relevant accounts and tax returns
• Prepare supporting evidence
• Communicate with HMRC on your behalf
• Review potential tax, interest and penalties
• Challenge conclusions where appropriate
• Support you through the investigation until it is closed

Written by Steve Watts

Steve Watts is the Accounting Director at Merranti Accounting and a Chartered Management Accountant with the Chartered Institute of Management Accountants. He also holds a CIMA Member in Practice Certificate.

Steve qualified as a CIMA accountant in 1995 and has more than 20 years of commercial finance and accounting experience.

His career includes three years with a major housebuilding plc, two years in the serviced-apartment sector, four years managing a large fund-owned property investment portfolio and nine years working in property development. His experience includes joint ventures, offshore companies, trusts, financial strategy and the management of complex business structures.

At Merranti Accounting, Steve works with company directors, business owners and individuals across areas including financial strategy, management accounts, VAT, payroll, bookkeeping and tax returns.

His practical commercial experience helps him assess not only whether accounting records meet a reporting requirement, but whether the figures provide a credible and consistent account of how the business operates. This is particularly important during an HMRC compliance check, where clear records and well-supported explanations can determine how efficiently questions are resolved.

Steve’s approach focuses on ensuring that clients understand what HMRC is asking, why particular records are relevant and what steps are required to protect their position while cooperating appropriately.

This article provides general information and should not be treated as personalised tax or legal advice. HMRC’s powers, applicable time limits and the correct response will depend on the type of tax, the nature of the investigation and the taxpayer’s individual circumstances.