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HMRC Tax Investigation: What Happens When HMRC Checks Your Tax Return?

Receiving a letter from HMRC saying that they want to check your tax return can be worrying, particularly if you are self-employed and your tax return contains a lot of figures, business expenses and other information. However, an HMRC tax investigation does not automatically mean that HMRC thinks you have done something wrong. HMRC carries out compliance checks for many different reasons, with the general aim of making sure that the correct amount of tax has been paid and that claims for allowances and tax reliefs are correct.

For a sole trader or small business owner, an HMRC investigation can involve questions about your sales, business expenses, bank transactions, invoices, records, tax calculations or other parts of your tax return. The important thing is not to ignore the letter and not to panic, because there is a process to follow and you normally have an opportunity to provide HMRC with the information needed to explain your tax position.

What is an HMRC tax investigation?

An HMRC tax investigation, more formally called a compliance check or HMRC tax enquiry, is when HMRC checks your tax affairs to establish whether your tax return or other information given to them is correct. HMRC can check an individual’s Self Assessment return, a company’s tax return, PAYE records, VAT matters and other tax information.

The investigation might be relatively simple, for example HMRC may ask you to provide evidence for one particular expense or explain a figure on your return. In other cases, the check can be much wider and HMRC may examine several years of records and different areas of your tax affairs.

It is therefore important not to assume that every HMRC investigation is a full tax investigation. Some compliance checks are quite limited, while others can become much more detailed depending on what HMRC finds.

What triggers an HMRC investigation?

There is no single reason why HMRC chooses one taxpayer for a compliance check. HMRC has the power to check tax returns, and certain figures or circumstances may make a check more likely. For example, HMRC may look more closely at figures that appear unusual or inconsistent, large repayment claims or situations where the amount of tax declared does not appear to match the information available to them.

For a self-employed person, unusual movements in turnover or expenses, large claims for certain deductions, significant changes compared with previous years, inconsistencies between information provided to HMRC and other information available to them, or questions about whether an expense is genuinely a business expense can all result in further questions.

However, being investigated does not necessarily mean that you have made an error. HMRC uses compliance checks as part of its normal approach to checking whether the tax system is operating correctly, so an investigation should not automatically be treated as an accusation of tax evasion.

Can HMRC investigate my tax return if I have done nothing wrong?

Yes. HMRC can check a tax return even where there is no deliberate attempt to avoid tax and even where the figures ultimately turn out to be correct. A compliance check is intended to establish the correct tax position, so HMRC may ask questions simply because it wants evidence supporting something included on the return.

This is one reason why good bookkeeping and keeping proper records are so important. If you can provide invoices, receipts, bank records and other evidence supporting your tax return, it is much easier to explain your position when HMRC asks questions.

If you are unsure about your record-keeping responsibilities, you may also find our guide on how long you need to keep receipts in the UK useful.

What does an HMRC tax investigation letter look like?

HMRC will normally contact you by letter or phone when it starts a compliance check, explaining what they want to check and why. If you have an authorised tax agent, HMRC can also communicate with the agent about the check.

The letter should tell you what tax return or tax period is being checked and may ask you to provide particular documents or explanations. HMRC’s initial information request will often be made by letter, particularly where the check concerns a Self Assessment return.

Do not ignore an HMRC tax investigation letter simply because you believe your tax return is correct. The best response is normally to read the letter carefully, identify exactly what HMRC is asking for and provide a clear response within the requested timescale.

What happens during an HMRC tax investigation?

HMRC will normally ask questions and request documents that allow the officer to establish your correct tax position. Depending on the type of check, this could include accounts, invoices, receipts, bank information, bookkeeping records, calculations and explanations of particular transactions.

For example, if you are a sole trader and HMRC questions your motor expenses, you may need to explain how the vehicle is used for the business and provide supporting records. If HMRC questions your turnover, you may need to reconcile your sales records with your bank account, invoices and bookkeeping records.

HMRC may also ask additional questions as the investigation develops. A question that starts with one expense can sometimes lead to questions about other parts of the tax return if the information provided creates further concerns.

How long does an HMRC tax investigation take?

There is no fixed period that every HMRC investigation must take. A straightforward check may be resolved relatively quickly, particularly if the requested information is clear and complete, while a more complicated investigation involving several years, large amounts of information or several different tax issues can take considerably longer.

The length of the investigation will often depend on the complexity of the case, how quickly information is provided, whether HMRC needs to ask additional questions and whether there is disagreement about the correct tax treatment.

If HMRC finds that everything is correct, it should close the check. If it identifies an underpayment, HMRC may issue an assessment or amend the return to collect the additional tax, and interest and potentially a penalty may also apply.

What is the HMRC tax investigation time limit?

This is an area where it is important to distinguish between the time HMRC has to open a normal Self Assessment enquiry and the longer time limits that can apply when HMRC discovers an underpayment of tax.

For a Self Assessment return, HMRC generally has 12 months from the filing date to open a normal enquiry into the return, subject to the detailed rules and circumstances applying to the particular return.

However, the fact that the normal enquiry window has closed does not necessarily mean that HMRC can never investigate an earlier tax year. Where HMRC makes a discovery assessment, different time limits can apply. The normal time limit can be four years from the end of the relevant tax year, increasing to six years where the loss of tax was brought about by careless behaviour. In certain circumstances involving offshore matters, a 12-year limit can apply, while deliberate behaviour can result in a 20-year time limit.

This means that the answer to the question “How many years can HMRC investigate?” is not simply four years or six years. The applicable time limit depends on the circumstances, the type of tax issue and the behaviour involved.

What happens if HMRC finds a mistake in my tax return?

If HMRC finds that your tax return contains an error, the outcome will depend on what happened and whether the error resulted in tax being underpaid or overclaimed. You may have to pay additional tax and interest, and HMRC may also charge a penalty where the conditions for a penalty are met.

HMRC considers factors such as whether the error was careless or deliberate and how you behaved during the compliance check. Cooperation can affect the level of a penalty, with greater cooperation potentially reducing the penalty.

An innocent mistake and deliberate tax evasion are therefore not treated in exactly the same way. If you discover that something is wrong, it is generally better to address the problem openly rather than trying to hide or delay it.

Can HMRC charge a penalty after an investigation?

Yes, a penalty can be charged if HMRC finds an inaccuracy that has resulted in tax being unpaid, understated or overclaimed and the inaccuracy was caused by careless, deliberate or deliberately concealed behaviour.

The amount of any penalty depends on the circumstances and the taxpayer’s behaviour, including the quality of the disclosure and the level of cooperation with HMRC. This is why responding properly to an investigation can be important even when you accept that an error has been made.

It is also worth remembering that an HMRC investigation does not automatically result in a penalty. If HMRC finds that your tax position is correct, the check can simply be closed without additional tax being due.

Should I speak to an accountant if HMRC investigates me?

You do not have to deal with an HMRC investigation completely on your own. If you already have an authorised tax agent, HMRC can communicate with the agent about the compliance check, and an accountant can help you understand what HMRC is asking for, gather the relevant records and prepare a response.

This can be particularly useful when the investigation involves several years, complicated expenses, property income, capital gains, VAT or questions about whether income has been declared correctly.

Accountancy fees connected with dealing with HMRC enquiries may also have different tax treatment depending on what the work relates to. You can read more in our article Are accountant fees tax deductible in the UK?.

Can HMRC investigate several tax years at once?

Yes, depending on the circumstances, HMRC can examine more than one tax year or more than one area of your tax affairs. A compliance check can also develop into work involving different taxes where information discovered during the check creates another tax risk.

This is one reason why an apparently small question from HMRC should not automatically be treated as something that can be answered without checking the underlying records. If the figures or explanations provided raise further questions, the scope of the work can become wider.

What if I cannot afford to pay the tax HMRC says I owe?

If an investigation results in additional tax becoming payable and you cannot afford to pay the full amount immediately, you should not simply ignore the bill. HMRC allows taxpayers who cannot afford to pay immediately to contact them about payment arrangements.

The important point is to deal with the liability and payment arrangements separately from the question of whether HMRC’s calculation is correct. If you disagree with the tax decision, you may have rights to appeal, while a payment problem should also be addressed as soon as possible.

What should I do if HMRC has already contacted me?

If HMRC has already sent you a tax investigation letter, do not ignore it and do not automatically assume that you have done something wrong. Start by identifying the tax year, tax return and specific information HMRC wants to see, then gather the relevant records and consider whether you need professional help with the response.

If you are self-employed and HMRC is questioning your tax return, an accountant can help review the figures, identify potential problems and communicate with HMRC on your behalf where authorised to do so. The earlier the situation is understood properly, the easier it is usually to deal with the investigation in an organised way.

For taxpayers who have discovered undeclared income or another historic tax problem rather than simply receiving a routine enquiry, the approach can be different. You can also read our guide on what the penalty for voluntary disclosure to HMRC can involve.

Final thoughts on HMRC tax investigations

An HMRC tax investigation can be stressful, but receiving an enquiry letter does not automatically mean that you are facing a penalty or that HMRC believes you have deliberately avoided tax. The purpose of the compliance check is to establish the correct tax position, and many checks are resolved once HMRC receives the information it needs.

The most important things are to respond on time, keep your explanations accurate, provide the records requested and get professional help if the questions are complicated or you are concerned that previous tax returns may contain errors. For a self-employed person or small business owner, dealing with an HMRC investigation properly from the beginning can prevent a relatively simple enquiry from becoming unnecessarily complicated.

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