How to deal with an HMRC investigation
Facing an investigation into personal or business tax affairs? Tax expert Craig Coyle offers tips on how to deal with an HMRC investigation and what triggers them.
How to deal with an HMRC investigation: a step-by-step guide
Given that it is rarely a sign of good news, there are few sights more dreaded than a brown envelope with the HMRC logo in the corner. The letter may mark the start of an HMRC enquiry into the tax affairs of an individual or a limited company, which can quickly grow arms and legs!
Initial notification is the first step in the process by which HMRC will ask questions about a tax return which has previously been submitted. Whilst this is never going to be an enjoyable process, some steps should be taken to manage the risk of it becoming something significantly more unpleasant.
Step one: Engage a competent accountant
Though it might seem obvious, engaging a competent accountant to prepare the returns in the first place is step one. Whilst this will not necessarily prevent an HMRC investigation, it should mean there is less likely to be an adjustment arising from one.
Step two: Tax investigation insurance
Have tax investigation insurance in place. This should cover the costs incurred in engaging your accountant to deal with HMRC and resolve the matter. Enquiries can be time-consuming for both advisors and clients, and having to make a settlement with HMRC and also pay fees does not tend to make for happy clients in our experience.
Step three: Contact a Tax advisor
It is important to consider whether HMRC are able to ask the questions which they are asking, to ensure a professional line of communication with HMRC, and to make sure queries are answered accurately. A suitably qualified and experienced Tax advisor can perform this role.
Step four: Don’t put your head in the sand
While the prospect of HMRC looking into your tax affairs might be unpleasant, sticking your head in the sand and hoping it might go away is not an option.
There will likely be a deadline for replying, and it is important to meet this as it will help mitigate any penalties and foster a good relationship with HMRC.
What triggers an HMRC investigation?
A normal enquiry by HMRC might be triggered as follows:
- A random enquiry;
- By something picked up on during a manual review, which piques the interest of an HMRC inspector; or
- An analysis by HMRC’s systems suggests an anomaly worthy of further investigation.
For example, an enquiry is much more likely for an individual in the year of a significant disposal than in one in which they are returning salary and some bank interest.
What about PAYE inspections or VAT inspections for limited companies?
A limited company may also be informed of a PAYE or VAT inspection, whereby HMRC will visit the premises to ask questions and look at the records. In our view, it is very helpful to have a Tax advisor present for such a visit, so the process can be managed and parameters appropriately set.
Are HMRC investigations purely a civil matter?
More seriously, a Code of Practice 9 (CoP9) investigation from HMRC may take place where they suspect fraud. Whilst this remains a civil matter, it can become criminal.
A normal enquiry may turn into a CoP9 in certain circumstances. The COP9 process will require the taxpayer to make a full disclosure of any irregularities in their affairs, without being told the details of HMRC’s suspicions. This is a useful tool for HMRC to gather fuller “confessions” as, if the taxpayer does not include the fraud which HMRC suspects, the matter may become criminal.
How to deal with an HMRC investigation: key takeaways
HMRC investigations can be stressful, but business owners can reduce disruption and risk with careful preparation:
- Engage a competent Accountant: A well-prepared tax return reduces the likelihood of adjustments if investigated;
- Tax investigation insurance: This can cover professional fees incurred during an enquiry;
- Involve a Tax Advisor: A qualified tax advisor ensures HMRC’s questions are appropriate and responses are accurate; and
- Respond promptly: Ignoring HMRC correspondence can lead to penalties. Always meet deadlines and maintain professional communication.
Triggers for Investigation
HMRC may launch an enquiry due to random selection, anomalies flagged by their systems, or issues noted during manual review, especially following significant transactions like asset disposals.
PAYE and VAT Inspections
Limited companies may face on-site PAYE or VAT inspections. Having a tax advisor present helps manage the process and set boundaries.
Civil vs Criminal
Most enquiries are civil, but if HMRC suspects fraud, a Code of Practice 9 (CoP9) investigation may follow. This requires full disclosure and could lead to criminal proceedings if fraud is omitted.
By acting early, engaging the right professionals, and maintaining transparency, business owners can navigate HMRC investigations more confidently and with minimal disruption.
Subject to an HMRC investigation? Consilium can help
Consilium’s Tax team has significant experience dealing with all the enquiry types above and HMRC investigations. We would be delighted to help if you find yourself in receipt of the dreaded brown envelope.
We aim to close the enquiry as soon as possible whilst seeking to minimise any tax and penalties which may be payable. Consilium’s existing clients should also contact us to discuss insurance if they do not already have cover in place.
Consilium provides comprehensive Tax services from Tax compliance, Tax planning and Personal tax to practical help with VAT, Inheritance tax, Capital Gains Tax and HMRC investigations.
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Craig Coyle has been a qualified Chartered Accountant since 2001 and a Tax specialist for over 20 years. As Tax partner at Consilium Chartered Accountants, Craig advises business owners and entrepreneurs on all matters relating to Corporate and Personal Tax. Craig is also a member of the Chartered Institute of Taxation.
