Preparing for an HMRC Investigation: [Complete guide 2024]

Finding out that you have been earmarked for an HMRC investigation is scary. Tax investigations can take place for a wide range of reasons. Not all of them mean you’ve done something wrong though. With the right support, you can prepare for an HMRC investigation properly and get through it with minimal stress.

What is a tax investigation?

An HMRC tax investigation is initiated by the tax authorities. The investigation reviews your business finances to ensure you are paying the correct amount of tax now and in the past. Although many tax investigations are looking at a specific area of your tax affairs, sometimes the HMRC investigation takes a more wider ranging approach to review your complete tax situation.

You are required by law to cooperate with an HMRC tax investigation.

What happens if you fail to cooperate with the investigation?

If you don’t cooperate with an HMRC investigation, you could find yourself in big trouble, including increased penalties and potential legal action. HMRC may escalate the situation to criminal charges for serious cases of suspected fraud. This can lead to a prison sentence. HMRC have the authority to search premises and seize documents. A prolonged investigation can damage your personal or business reputation, so it’s vital to cooperate fully and seek professional advice from a qualified tax investigation accountant.

Recognising an HMRC Investigation

It’s always a bit stressful to see the little brown envelope from HMRC on your doormat. If you receive a letter from HMRC about a tax investigation, try not to panic. Contact your accountant immediately so they have time to help you prepare well.

HMRC may decide to focus on one area of your tax affairs. At the time of writing (August 2024), there are lots of HMRC R&D tax credits investigations and HMRC bounce back loan investigations. Alternatively, HMRC might decide to do a comprehensive, deep-dive into all areas of your business and personal finances.

Documents typically required during an investigation

Make sure you have the following documents available for review if you are subject to an HMRC investigation:

• Bank and credit card statements
• VAT records
• Purchase invoices and expense receipts
• Sales invoices and credit notes
• Chequebooks and paying slips
• Job quotes or pricing estimates
• Payroll records

What triggers an HMRC investigation?

The most common reason for tax investigations are errors or omissions on your tax returns. This could include paying too little or too much tax, failing to include the right supplementary information or simply failing to include a section on your tax return. It’s all too easy to miss something if you are tackling your tax returns yourself, so consider using an accountant who will know exactly which parts of the form must be completed.

HMRC may be targeting specific areas of tax for review to reduce tax evasion. Since COVID, tax fraud has increased significantly, so HMRC focus on certain businesses who appear to have little to no tax to pay.

Sometimes, suspicious activities trigger an investigation. If you have high expenses compared to your income or are always late submitting your tax return, this could cause suspicion.

Time limits for HMRC investigations

Normally, HMRC has a standard four-year investigation period. This means they can look back over the past four years of your tax affairs for evidence of wrongdoing or errors in your tax payments. However, if they find you have been careless in your tax returns (i.e. regularly making errors), they can go back six years and if there’s evidence of deliberate tax avoidance, they can go back 20 years. This is why it’s so important to maintain your financial records long-term. You never know when you might be asked to provide them.

Preparing for a tax investigation

A tax investigation can suck up a lot of time and resources and will no doubt arise at the worst possible time for you and your business. Hiring professional assistance to prepare your records ahead of the tax investigation can remove much of the stress from the situation.

Potential outcomes of a tax investigation

There are a range of possible outcomes from an HMRC tax investigation. You may be asked to make minor corrections to your records. This could result in additional tax, fines and interest to pay or for serious offences, you may be given a criminal conviction, fines and/or prison time.

If HMRC finds large discrepancies or errors in your tax returns, they are likely to assume that you have made similar errors in the past. This is known as presumption of continuity of errors. They will probably involve their right to look back further into your tax history.

You have the right to appeal against an HMRC decision in your tax investigation case and you must lodge your appeal within 30 days of the investigation decision.

Managing the investigation process

As we’ve said before, you must cooperate with HMRC by law. This means you must respond to their initial letter, provide requested information promptly and reply to any questions seeking clarification when needed.

If you are unsure about any part of the process, it’s sensible to talk to an accountant who has experience of managing HMRC tax investigations.

Post-investigation considerations

Once the investigation has concluded, you will need to focus on implementing changes to avoid future issues. Be aware that HMRC may make follow-up checks to ensure you have made changes to avoid future errors.

You could also consider taking out tax investigation insurance. The insurance typically covers:

• Costs of accountants or tax advisors representing you during an investigation
• Legal fees if needed
• Expenses related to providing documentation and evidence
• Representation for various types of HMRC inquiries, including income tax, corporation tax, PAYE, VAT, and IR35 disputes.

Being investigated by HMRC? Contact us for professional, empathetic support.

At Adams Accountancy, we’ve supported clients through HMRC investigations on a range of tax topics, including VAT, PAYE and CIS. We can support you to be fully prepared for your investigation and help bring it to a swift conclusion.

Call us on 01322 250 001 for a free chat or contact us online about how we could take the pain out of your HMRC tax investigation.

Frequently Asked Questions about HMRC investigations

Is an HMRC investigation the same as a tax inspection?

Yes, the two terms mean the same and may also be known as an ‘enquiry’,’intervention’ or ‘compliance check’.

How likely is an HMRC tax investigation?

Given HMRC receive several million tax returns each year, an investigation is unlikely unless you have discrepancies, anomalies or your company is perceived as a risk.

How does HMRC decide whether to conduct a civil or criminal investigation?

HMRC is not responsible for deciding if a case will be criminally prosecuted. This decision is made by the independent prosecution authorities:

Crown Prosecution Service in England and Wales,

Crown Office and Procurator Fiscal Service in Scotland, and

Public Prosecution Service Northern Ireland

Can HMRC investigate my personal finances if they’re investigating my business?

Yes, HMRC can ask to look at every aspect of your tax affairs as part of their tax investigation.