What happens during a tax investigation?

HMRC's £100m ‘super computer’ called HMRC Connect is designed to monitor the digital footprint of sole traders and businesses that have potential discrepancies between their income and the tax they pay.  It draws on third party information including from (among many others) bank accounts, council tax records, land registry, eBay and internet adverts which tax offficers may then compare to information on returns.

A tax investigation from HMRC can be both time consuming and stressful in equal measure – particularly if you aren’t prepared for it. Normally HMRC will look at a recent return, however if it is found that insufficient tax has been paid, or if the loss of tax is due to careless or deliberate behaviour then they can go back and look at business records and returns from earlier periods. In serious cases of suspected fraud and tax avoidance, HMRC can go back as far as 20 years.

How long do HMRC tax investigations last?

The length of an HMRC tax investigation will depend on how many areas of a business are being scrutinised. If it is just one area – known as an Aspect Enquiry – these investigations tend to last around six months. If HMRC is forced to conduct a Full Enquiry into multiple areas of a business, it can last up to 18 months or more. At the time of writing, HMRC continues to employ significant resources in dealing with Covid Fraud. Consequently, the lead times for HMRC dealing with other tax enquiries has significantly extended

What to expect during an HMRC tax investigation

The first indication that HMRC wishes to investigate your business’ tax affairs will arrive in the form of a formal notice of enquiry into yours and/or your company/partnership return which will informally request information by a certain date. This will be sent directly to you and your accountant. This notice will typically include the type of investigation required and the areas of the business in question, such as:

• Self-assessment tax returns
• PAYE records (employers only)
• VAT returns 
• Accounts and tax calculations
• Company tax returns 

If HMRC does not receive the information it has informally requested, it can follow up with a formal information notice with a short timescale to supply the outstanding information. If it is not supplied by the formal deadline, HMRC can charge an automatic penalty of £300 and up to £60 per day for each day the information remains outstanding. HMRC’s tax investigators are permitted under certain circumstances to liaise with third parties regarding your business’ operations, as well as employees. HMRC is also likely to request to view your bookkeeping records.

The tax investigators will review your business’ accounts and records in detail, and may have questions to ask regarding your income and expenditure. These may be asked face-to-face or via telephone or email. You aren’t legally obliged to meet face-to-face, but sometimes this can help the investigation to advance. This may sometimes extend into HMRC asking about personal finances if they establish that a client’s lifestyle doesn’t match their reported income.

HMRC will notify you once the tax investigation has concluded and inform you of the outcome. Any discrepancies will be noted, and you may be charged penalties and interest if any tax has been underdeclared. Penalties can be as high as 100% for those found to have displayed deliberate or fraudulent behaviour, but in less severe cases these penalties can be lower.

HMRC is also investigating potential abuse of the Government’s Covid support schemes

As of June 2021, HMRC was also placing significant emphasis on investigations into the potential abuse of the Government’s coronavirus business support schemes. Approximately 12,828 enquiries were launched up to the end of March 2022, and HMRC contacted over 63,000 people via one-to-many campaigns..

In the March 2021 Budget, the Chancellor pledged an additional £100m in forming a specialist fraud taskforce for the Government’s coronavirus support packages. As part of this funding, HMRC recruited an additional 1,100 new staff to become a part of this dedicated Covid-19 support scheme fraud taskforce.

What is a Tax Investigation Service and how can it help?

An HMRC investigation into your tax affairs can be time consuming and stressful, so you should consider seeking professional representation from your accountant to ensure an early resolution. The fees for such representation could run into hundreds, if not thousands of pounds, depending on how deeply HMRC investigate and what they find.

At TaxAssist Accountants, we can offer you a Tax Investigation Service (sometimes referred to as Fee Protection) for a small annual fee. This will mean you will be protected against the additional professional costs, stress and uncertainty brought about by an HMRC enquiry. Your TaxAssist Accountant will also have access to an expert in tax investigations should the enquiry be more complex and look as it will be a long and drawn-out investigation. 

This provides peace of mind that the investigation will be dealt with on your behalf, limiting the concern and stress of spiralling additional fees.

How can your accountant help?

If you wish to learn more about our tax investigation fee protection service, you can arrange a free initial consultation with us today on 01206 576800. Alternatively, you can use our online contact form to outline your position as a self-employed sole trader or small business and we’ll do the rest.

Date published 22 Oct 2021 | Last updated 20 Mar 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.