HMRC’s tax investigations – what to do (and how to avoid them)

HMRC’s tax investigations – what to do (and how to avoid them) Alex Robertson June 3, 2024

The most recent figures available show a continuing growth in HMRC tax investigations into small businesses and individuals – up to quarter of a million a year at last count.

We all tend to agree that HMRC needs to maximise tax revenues, but an investigation can be a stressful experience, so understanding the reasons behind a potential investigation can help you prepare.

The most common trigger in an investigation is red flags on your returns

  • Inconsistent Figures: Unexplained discrepancies between income declared and your lifestyle, or a significant drop in income year-on-year, can raise red flags. HMRC uses data analysis to spot these inconsistencies.
  • Late Filings: Regularly filing your tax return late can suggest a lack of transparency or carelessness regarding your tax obligations.
  • Unclear or missing information: Incomplete or ambiguous information in your tax return can trigger an enquiry to clarify any doubts HMRC might have.
  • Claimed Allowances or Deductions: While claiming legitimate expenses and allowances is encouraged, excessive or unusual claims can prompt HMRC to investigate their validity.

Of course, all this can be pretty much eradicated by getting us to deal with it for you. Presenting your information properly and on time can be done much easier with sound professional support.

All that notwithstanding, there are certain industries that are considered, by HMRC, to be high-risk for tax evasion due to the potential for cash-in-hand transactions or under-declared income. These include tradespeople, those in the service industry, and those with fluctuating incomes.

There might also be third-party information – where HMRC can receive ‘tip-offs’ about your finances from various sources, such as banks, employers, or whistleblowers. This information can trigger an investigation if it suggests discrepancies with your tax return.

And those tip-offs may support suspicions of tax fraud, money laundering, or deliberate tax evasion. These are serious offences and can lead to criminal prosecution and heavy penalties. This isn’t you of course, dear reader. That happens to other people.

Prevention is better than cure, of course, so taking 

  • File your tax return on time: Meeting deadlines demonstrates your commitment to tax compliance.
  • Be accurate and complete: We can help make sure everything is in order before submitting it, and make sure all income and expenses are declared truthfully.
  • Keep good records: We say this a lot, but keep organised financial records for at least six years. This makes it easier to respond to any HMRC enquiries.

But if none of that works, and an investigation is launched, what should you do?

  • Don’t panic: HMRC investigations can range from simple enquiries to complex investigations. Stay calm and seek professional advice.
  • Respond promptly: HMRC will contact you if they require further information. Respond promptly and thoroughly, providing all requested documentation.
  • Be transparent and accurate: Honesty is key. If you’ve made a genuine mistake, disclose it and explain the reasons behind it.
  • (Again) Keep records: Always maintain clear and accurate financial records, including receipts, invoices, and bank statements. This will be crucial if you need to provide evidence to HMRC.

We can make sure you do all you can to avoid an investigation, but no-one is fully immune, so if the worst comes to the worst, we can guide you through the process. Get in touch and we can talk you through all your options.