An HMRC Tax Investigation, also known as a compliance check, is an official review of an individual’s or business’s tax records. HMRC wants to confirm that they are calculating and paying their taxes correctly. These investigations therefore allow HMRC to enforce tax laws and address any errors, omissions or suspected fraud.
There are three primary types of HMRC tax investigations:
1. Aspect Enquiry
HMRC examines a specific part of your tax return, such as your expense claims.
2. Full Enquiry
This review covers your entire tax return and financial records. HMRC might also look into the personal finances of company directors.
3. Random Check
HMRC may select you for a review at random, even if there are no apparent issues.
What Triggers a Tax Investigation?
HMRC uses a data analysis system called “Connect” to cross reference millions of data points. These come from banks, tax returns, employers, social media and other government departments. If any inconsistences arise, it could lead to an investigation.
Common triggers include:
- Errors or omissions on your tax return
- Significant changes in income and expenses
- Repeated late filings or amendments
- Working in high-risk, cash-heavy industries
- A lifestyle that does not align with declared income
- Reports or tip-offs from third parties
Even without these triggers, HMRC could still select you for a random check.
What Happens During a Tax Investigation?
The process begins with an official letter or phone call from HMRC. This communication outlines the type of investigation they will conduct and also lists the information you must provide. You must respond promptly and submit accurate information.
HMRC may request:
- Self Assessment tax returns
- Business bank statements
- VAT returns and related documentation
- PAYE records if you have employees
- Receipts and proof of income or expenses
They may also ask you to attend a meeting or answer further questions by phone or email. If so, you should take clear notes and record names to keep a log of all correspondence.
How Long Does an Investigation Take?
The duration of a tax investigation depends on its complexity:
- Aspect Enquiries typically last 3 to 6 months
- Full Enquiries can last 12 to 18 months or more, especially if HMRC uncover significant issues
Outcomes of an Investigation
Once the investigation concludes, HMRC will issue a formal outcome. Possible results include:
- No further action (your tax records are accurate)
- A tax refund (you have overpaid and will receive a rebate with interest)
- Owing additional tax (you must repay the amount due with interest)
- Imposed penalties (if HMRC finds the error was due to carelessness or fraud)
You have 30 days to appeal HMRC’s decision if you disagree with the findings.
Penalties and Time Limits
Penalties depend on the nature of the mistake:
- Up to 30% of the unpaid tax for genuine mistakes
- Between 20% and 70% for voluntarily disclosing deliberate errors
- Up to 100% of the unpaid tax for deliberate errors and concealing fraud
How far HMRC goes back historically also depends on the nature of the mistake:
- Up to 4 years for basic errors
- Up to 6 years for careless mistakes
- Up to 20 years for deliberate evasion
How to Prepare for a Tax Investigation
You can make the process less stressful by taking the time to prepare. Preparation ensures that you can provide the right information quickly and accurately. You should:
- Keep detailed and up-to-date financial records
- Understand your tax responsibilities
- File returns on time to avoid unnecessary scrutiny
- Conduct internal audits to catch issues early
- Consider Tax Investigation Insurance to cover professional fees
What Taxes Can HMRC Investigate?
HMRC may review several types of taxes, such as:
- Income Tax
- Corporation Tax
- VAT
- Capital Gains Tax
- PAYE
- National Insurance
- Construction Industry Scheme (CIS)
- IR35 (off-payroll working rules)
Is a Tax Investigation a Criminal Case?
Most investigation are civil, focusing on errors or unpaid taxes due to oversight. In these cases, HMRC issues fines or penalties. However, if they suspect serious fraud, a criminal investigation may follow.
If you are unsure whether the investigation is civil or criminal, you should seek advice or contact HMRC directly.
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