HMRC Tax Investigation Advice

  • Written By : Kasra Dash
  • Time : 11 minutes

The three types of tax investigation

There are three types of HMRC tax investigation, each carried out for varying reasons, which we’ve outlined below.

1. Full Enquiry

In a full enquiry, HMRC will look at your business records in their entirety. They will do this when they suspect a serious error or risk. For example, if investigating a limited company, HMRC tends to also look into the tax affairs of the company’s directors.

2. Aspect Enquiry

An aspect enquiry is where HMRC looks into particular aspects of your company accounts. This could include inconsistencies, mistakes and more in certain sections of returns.

3. Random Check

HMRC carry out random HMRC tax investigations, known as a ‘random check’. No matter how careful and law-abiding you are with your taxes, random checks can happen to whoever, whenever.

How do you know if HMRC is investigating you?

You’ll know if HMRC is investigating you upon the delivery and opening an HMRC-stamped brown envelope to your registered address. Within the letter will be HMRC informing you of what type of investigation is taking place, whether it’s a random check, aspect or full enquiry. 

If you receive an HMRC tax investigation letter, it’s best to contact your accountant immediately for advice on why you might be getting investigated.

What is an HMRC Investigation?

HMRC carries out HMRC tax investigations to check you’re paying the correct amount of tax. If your business is investigated, you’ll receive a letter from HMRC themselves, or you’ll get a phone call from them. This will detail what they want to look into.

The letter or phone call may discuss details such as:

  • Tax Calculations
  • Accounts
  • Tax Payment History
  • Company Tax Return
  • Self Assessment Tax Return
  • Income Tax and Corporation Tax
  • PAYE records relating to your employees
  • VAT Return and VAT records if you’re VAT-registered.

If you have an accountant who submits your returns on your behalf, there is a chance HMRC will contact them directly. Your accountant should then contact you to discuss it further.

Why is HMRC Investigating My Company?

Sometimes HMRC will launch an investigation randomly; other times, they may have received an anonymous tip-off, noticed something that seems inconsistent or incorrect, such as a tax irregularity, tend to repeatedly pay tax late, or you have a significant drop in income. 

HMRC tax inspectors may look into bank statements, corporation tax returns, self assessment returns, income tax, PAYE and VAT.

Below we’ve outlined a few reasons why HMRC targets businesses:

  • The business is in a high-risk industry
  • HMRC targeting your sector specifically
  • HMRC received a tip-off about your company
  • Drastic income changes
  • Increase in costs
  • Your returns are always late
  • Your costs are above what is considered normal in your industry
  • Tax returns don’t match your living standard

As we’ve mentioned previously, sometimes HMRC investigations are randomly carried out to evaluate tax returns. This is why it’s always good to prepare your tax affairs with an accountant’s help.

Aspect, full and random investigations

There are three types of investigations HMRC will carry out, and the level is dependent on what they expect is at play. 

If HMRC suspects a large error or risk in a tax return, they will conduct a full enquiry or ‘full investigation. They will then review all records concerning the business and its director’s personal tax affairs.

If a business is investigated with an aspect enquiry, it means that HMRC has noticed a particular aspect of your accounts is concerning. This is usually a result of a misunderstanding or mistake.

In some cases, HMRC will launch an investigation completely randomly.

What Happens if you get Investigated by HMRC?

If HM Revenue and Customs carry out a tax investigation, you will be required to provide any information the investigating officers request for the investigation. If you believe the reasoning HMRC provides is incorrect, you can argue against supplying certain information.

HMRC have the power to look into exactly what has caused any anomalies, and if it’s a minor discrepancy, the case is quickly resolved and closed. When a tax investigation begins, it’s easy to jump to conclusions and worry, but an investigation doesn’t have to be classed as a criminal investigation.

Tax penalties

If you’re found to owe any extra tax by the end of any HMRC investigation, you will be subject to a penalty of different proportions. In the UK, tax evasion penalties can reach up to 200% of the total tax due. As tax avoidance and evasion are tax fraud, you could also be liable for a criminal prosecution.

If you’re found to be at fault, the financial penalties will include interest owed from the original due date, unpaid tax liability, and the penalty itself.

Depending on the reasons why any tax was underpaid and how much is due are the factors that determine how liable you are for a tax penalty. There are four reasons an HMRC investigation officer will use to categorise, which we discuss below.

Genuine Mistake or Misinterpretation

If you’re found to have made a genuine mistake that translates to you paying less tax than you should have, HMRC will treat them as innocent errors. This means there may be no penalty, but your tax audit adviser will need to prove that it was a genuine mistake or misinterpretation that was completely innocent in nature.

As evasion penalties can range from 10% all the way up to an eye-watering 200%, it’s best to have an expert accountant on your side. Contact the team at TaxBite today to ensure your accounts are law-abiding and free of errors.

Careless – Failure to take reasonable care

If you’ve failed to take reasonable care with your accounts and have made a careless mistake in your tax return, HMRC classifies this as failure to take reasonable care. An example of this would be failing to complete a section of your tax return or failing to declare part of your income. It’s worth noting HMRC doesn’t include basic arithmetic errors in this classification.

HMRC investigating officers class failure to take reasonable care as a moderate offence meaning the penalty could be up to 30% of the correct tax that was due. Hiring an accountant to properly manage your accounts and tax returns before a submission is your best preventative shield of defence in this case.

Tax Fraud – Deliberate Understatement

Regarded as a serious offence by HMRC’s standards, tax evasion is when a taxpayer deliberately omits income or information from their tax return in order to pay less tax for their own financial benefit. Tax fraud also encompasses those who over-exaggerate allowances or expenses to benefit them.

As tax evasion is a serious offence by law, the taxpayer could be subject to a tax evasion penalty of up to 70% of the tax owed.

HMRC recently introduced the Contractual Disclosure Facility (CDF) to invite taxpayers to disclose unintended or intended attempts to commit fraud when being investigated.

Income Not Declared – Punishment

HMRC hand out the most severe penalties to those who deliberately mislead HMRC when they complete a tax return. This involves taking certain steps to try and hide the fraud, such as destroying or amending invoices or expense receipts, creating false documents, or moving money to hidden bank accounts. This will launch a criminal investigation and can lead to criminal prosecutions.

The unpaid tax punishment for this kind of fraud is severe and can result in HMRC handing out a penalty of up to 200% along with a costly and lengthy tax investigation.

What Power and Authority do Investigation Officers have?

It’s no secret that HMRC has a lot of power when it comes to taxes and those that may be abusing the system. HMRC has similar authority and power to that of other law enforcement agencies. 

HMRC need the authority to apply for required information, apply for search warrants, carry out arrests, and search the premises of suspects following an arrest. Given this, it’s clear to see how serious predicted tax fraud is.

They have specific internal authorisation levels, and each officer must apply for approval before enforcing any of their authority and power. This goes all the way from Senior Officer Grade up to HMRC’s Higher Officer Grade.

They must tell you what taxes they’re investigating

HMRC must inform you what aspect of your taxes they are investigating and assessing. HMRC say they’ll only review records relating to tax, duty, or tax credit they’ve told you about.

HMRC investigating officers have the power to inspect a business premises

As per the 2008 Finance Act, HMRC has the power to inspect business premises. Most of their visits will be pre-announced, and they can only conduct an inspection, not a search.

If HMRC are obstructed during an inspection, there may be incurred penalties. It’s worth noting HMRC can interrogate computers during an inspection.

During the inspection, HMRC may include inspections of statutory books and records and private records that are part of the business. They also have the right to visit related third parties.

In the case of any unannounced tax investigations, a senior officer must first grant authorisation. When this happens, the HMRC officer will hand the inspection notice to whoever appears to be in charge. If you receive a notice, it’s always worth asking for an ID to confirm the details to avoid being targeted by an impersonator.

Tips for your accounts

While on some occasions, tax investigations are completely random, there are a few ways to reduce your risk of being subject to an HMRC tax investigation.

  1. Make sure your bank account balance matches the balance shown in your accounting software

Should you fail to take your opening balance into account, the balances won’t match at the end. Errors like this can mean you’re targeted by HMRC for a tax investigation.

  1. Keep copies of invoices for all the money you’ve received

Whenever you receive money, you must keep copies of all your invoices in case you’re investigated later on. You can do this efficiently by hiring a respectable accountant and using good accounting software.

  1. Keep copies of receipts for all costs in your business

It’s critical that you keep all receipts for any business costs.

  1. Don’t put off the paperwork – keep your books up to date

By keeping your books up to date, you won’t need to rush at the end of the year. There will be significantly less risk of any mistakes occurring, too. 


Which taxes can come under scrutiny?

The following taxes can come under scrutiny in HMRC tax investigations:

  • The tax you’ve paid to HMRC
  • Tax Calculations and your Accounts
  • Company Tax Returns
  • Income Tax Records
  • Corporation Tax records
  • Self Assessment Tax Return
  • Capital Gains Tax
  • Construction Industry Scheme (CIS)
  • IR35
  • PAYE returns or records
  • VAT returns or records

How to Appeal?

At the end of a tax investigation, you must provide the HMRC tax investigator with a notice of appeal if you want to challenge or appeal a tax penalty. This will then be reviewed by HMRC, and they can then adjust the tax penalty amount. If you would like to challenge the tax penalty further, you can do so by notifying your appeal to the tax tribunal.

It’s worth noting you must provide detailed reasoning concerning appealing a tax penalty. In that case, it’s best to seek out professional legal advice to ensure a higher chance of a successful appeal.

What triggers a tax investigation?

If you pay your tax late, make errors that require correction, or file your returns late, you may be susceptible to tax investigations or routine tax audits such as a local compliance audit. 

A tax investigation could also be triggered if you’re in a certain industry HMRC targets for that tax year. If there is any unusual activity in your accounts or tax records, this could also trigger a tax investigation.

Get Started

For help with HMRC tax investigations, you can contact the TaxBite team below. Our accountants offer professional advice for those targeted by HMRC’s investigations, tax inspections, Self Assessment tax returns, financial penalties, and HMRC enquiries.

How Can TaxBite Help

For assistance with criminal tax investigation seeking the help of specialist tax investigation lawyers and chartered accountants can assist with issues relating to underpaid tax, criminal investigations from tax authorities, 

Our specialist tax team are experts in managing business taxes, high-risk industry accounts, Income Tax investigations, Corporation Tax investigations, Tax Tribunal assistance and more.

Investigations can cause unexpectedly large tax bills and ignite a need for a company voluntary arrangement, or in some more serious cases, a creditors’ voluntary liquidation. So, contact our team today for advice relating to HMRC investigations.

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