Facing an HMRC investigation can prove both stressful and costly for UK businesses and individual taxpayers alike. What’s more, with HMRC now deploying increasingly sophisticated data analytics and artificial intelligence systems to identify discrepancies, the likelihood of scrutiny has never been greater.
As former HMRC inspectors, our team at Tax Advisors understands exactly what triggers investigations and how to protect yourself. In this guide, we’ll cover:
- The most common red flags that trigger HMRC investigations
- Different types of HMRC enquiries (and how they work)
- Step-by-step preparation to minimise risk
- What to do if you’re under investigation
- Proven strategies to reduce penalties and resolve disputes quickly
By the end, you’ll know how to spot early warning signs, safeguard your records, and respond effectively if HMRC comes knocking.
1. What Triggers an HMRC Investigation? (Top Red Flags)
HMRC doesn’t investigate taxpayers at random—they act on risk factors and anomalies in tax returns. Based on our insider experience, these are the biggest red flags:
Discrepancies in Reported Income
- Mismatched income (e.g., self-assessment vs. PAYE records)
- Large cash transactions (HMRC tracks bank deposits via Connect)
- Underreported side income (e.g., gig economy earnings)
Unusual Expense Claims
- High deductions compared to industry norms
- Personal expenses claimed as business costs
- VAT irregularities (e.g., inflated input tax claims)
Late or Inconsistent Tax Filings
- Missed deadlines (increases audit risk)
- Frequent amendments (raises suspicion)
Offshore Assets & Complex Structures
- Undisclosed foreign income (HMRC receives data from 100+ countries)
- Use of tax avoidance schemes (HMRC aggressively targets these)
Random Checks & Industry Crackdowns
- Sector-specific campaigns (e.g., construction, landlords, contractors)
- Whistleblower reports (disgruntled employees or competitors)
💡 Key Insight: HMRC’s Connect database cross-references bank records, property transactions, and even social media to detect inconsistencies.
2. Types of HMRC Investigations (And What to Expect)
Not all HMRC enquiries are the same. The depth and severity depend on the issue:
Type of CheckScopeHow Serious?
- Letter Check Simple query (e.g., missing info) ⚠️ Low risk
- Full Enquiry Deep dive into accounts & records 🔥 High risk
- COP9 (Fraud Probe) Suspected deliberate tax evasion 💀 Severe
- VAT Inspection Focus on VAT returns & invoices 🚨 Medium-High
What Happens During an Investigation?
- Initial letter (formal request for documents)
- Meetings/interviews (HMRC may visit your premises)
- Forensic accounting review (bank statements, invoices, emails)
- Final decision (tax bill + penalties if errors found)
💡 Tip: Never ignore an HMRC letter—delaying worsens penalties.
3. How to Prepare & Protect Yourself (Before an Investigation Starts)
Keep Impeccable Records
- Digital accounting software (Xero, QuickBooks)
- Store receipts for 6+ years (HMRC can go back 4-20 years for fraud)
- Separate business/personal accounts (avoid mixed transactions)
Conduct a Self-Audit
- Compare tax returns to bank statements (spot discrepancies early)
- Review expense claims (remove anything questionable)
- Check VAT calculations (standard error area)
Get Professional Representation
- A tax advisor can negotiate with HMRC (reduces penalties)
- Legal privilege applies to accountants (protects sensitive discussions)
Use HMRC’s Disclosure Facilities
- Voluntary disclosure = lower penalties (as little as 0-30%)
- Deliberate concealment = fines up to 100% of tax owed
💡 Expert Tip: If you suspect an error, disclose HMRC contacts to you—it drastically reduces penalties.
4. What to Do If You’re Under Investigation
Don’t Panic (But Act Fast)
- Acknowledge HMRC’s letter within 30 days
- Do NOT delete any records (destruction = evidence of guilt)
Gather Documentation
- Request a “closure notice” if the enquiry drags on
- Only provide what’s asked for (don’t volunteer extra info)
Negotiate the Best Outcome
- Dispute unreasonable demands (HMRC makes mistakes, too)
- Appeal penalties if you have a reasonable excuse
💡 Critical: Never lie or mislead—it turns a civil case into criminal fraud.
5. How Ex-HMRC Inspectors Can Help
At Tax Advisors, our team includes former HMRC investigators who know:
- 🔎 How HMRC selects targets
- 📝 What wording triggers deeper probes
- ⚖️ How to negotiate the lowest penalties
We’ve helped 500+ clients resolve disputes efficiently, often reducing fines by 50-90%.
Final Checklist: Are You Audit-Ready?
- Is all income reported accurately?
- Expenses properly documented?
- VAT returns reconciled?
- No undisclosed offshore assets?
- Professional advisor on standby?
If you’re unsure, get a pre-investigation review—it’s far cheaper than an HMRC penalty.
Conclusion:
HMRC investigations are increasing, but with the proper preparation, you can minimise risk and stress.