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How is an HMRC investigation instigated

How is an HMRC investigation instigated, written by John A Waller, Director. February 2nd,2023.

HMRC remains adept at investigating non-paying taxpayers. So be prepared to what to expect?

Company directors often, however, take the wrong decisions when they can’t pay VAT or corporation tax.

HMRC advise compliance checks remain triggered once they receive figures submitted that appear wrong. So if a small company unpredictably issues a VAT return claiming VAT remains far more significant than previously claimed or, conversely, a smaller amount payable to HMRC, further inquiries are prompted.

However, other reasons may trigger an investigation, such as:

  • regular late filing of returns,
  • tip-of to HMRC,
  • cash cow business, therefore, higher risk,
  • Tax returns do not reflect how you live,
  • You have a significant fall in income, increase in costs, or inconsistencies between different returns,
  • You stay in the high-risk HMRC target sector,
  • Furlough errors,
  • Operating expenses, not the industry average.

Furthermore, it remains essential to note the investigation can be random.

What business taxes HMRC investigate?

HMRC can investigate different types of business taxes, not just income tax. In addition, other areas of taxation investigated are: as follows:

  • Capital gains tax;
  • Climate change levy;
  • Construction industry scheme;
  • Corporation tax;
  • Insurance premium tax;
  • Landfill tax;
  • VAT.

How is an HMRC investigation instigated? – Types of HMRC investigation?

Three levels of HMRC enquiry exist:

  • full, 
  • aspect and 
  • random.
  • Full HMRC Enquiry

During a full enquiry, HMRC concerns itself with cases where it believes there is a significant risk of error in the tax return. In this type of enquiry, HMRC reviews all records, including the personal financial records of directors and other business owners.

  • Aspect HMRC Enquiry

If a business is subject to an aspect enquiry, HMRC is concerned about your accounts’ particular part (or parts) and wants more detail. Generally, the outcome points to a genuine mistake or misinterpretation rather than any intent to evade tax. 

  • Random HMRC Enquiry

HMRC picks a selection of businesses entirely at random to investigate.

What happens once HMRC decides to investigate?

Once HMRC decides to undertake a tax investigation, you must disclose the information HMRC requests. However, you can dispute the inquiry if you have sufficient reason to deny HMRC requests. HMRC will then review your dispute as to why HMRC instigated the investigation.

How is an HMRC investigation instigated? – Outcomes of HMRC Investigation?

The next move depends on the investigation’s findings. 

Common outcomes include:

  • Overpaying tax

HMRC will issue a tax rebate with interest if you have overpaid tax.

  • Underpaid tax 

The taxpayer pays any tax owed within 30 days and interest.

  • Intentional misconduct

If HMRC conducts a tax investigation and concludes no intentional misconduct. HMRC may consider criminal action.

You may be required to pay the penalty. The penalty amount depends on why you underpaid or over-claimed tax. 

As a company director of a limited company, however, it remains important to observe Directors duties and responsibilities at all times.

How is an HMRC investigation instigated? – How does an HMRC investigation end?

Once HMRC concludes its investigation. Then a decision notice is issued, or they agree on a contract settlement.

Decision notices are detailed in a letter explaining the HMRC final decision, possibly including a penalty notice or an assessment.

HMRC Contract Settlement

contract settlement remains a legally binding agreement between His Majesty’s Revenue & Customs and the taxpayer. The taxpayer pays the tax agreed, and HMRC ceases further recovery steps.

Notably, once HMRC concludes a return investigation, they cannot, therefore, examine it again.

Contact number for HMRC


Bounce Back Loan advice for Company Directors

Directors should seek professional advice if they have Bounce Back Loan worries regarding repayments. The UK government introduced the COVID-19 support scheme to support businesses through the pandemic. owever, repaying the loans has been difficult. So ensure you seek advice sooner than later.
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