What to Expect From an HMRC Tax Investigation
If you've received a letter from HMRC, the first thing to do is work out exactly what it's asking for and when to respond. A compliance check does not mean HMRC has decided something is wrong. If HMRC hasn't contacted you but you already know there's a problem, go to the voluntary disclosure section below.
Brookwood Accountancy gives Oxfordshire businesses a named accountant, HMRC agent representation, and support from day-to-day compliance through to a Virtual Finance Director, from the Old Post Office in Kidlington, where we've supported local businesses for over 35 years.
HMRC opens most compliance checks on a risk basis. Its Connect system compares what you've filed against third-party data and sector patterns. Accurate, consistent, timely returns attract fewer flags, though some cases are still selected at random.
This guide covers what can trigger a check, the type of letter you may receive, how the process runs, how far back HMRC can assess, and the penalty bands.
If we act as your HMRC agent, we deal with the correspondence. Our tax and accounts team handles the detail, and a senior adviser steps in where the enquiry turns commercial or a previous accountant's history needs untangling. That matters, because the questions go into where income came from, whether it was all declared, why entries were made, how cash was recorded, and where personal spending ends and business spending begins.
How Likely Are You to Be Investigated by HMRC?
HMRC does not check every return. Connect has been running since around 2010, cross-referencing bank interest, Companies House filings, VAT returns and PAYE against what you've declared. Digital platforms have reported seller income since January 2024 under OECD reporting rules, and offshore data arrives via the Common Reporting Standard. When one source contradicts another, the risk score rises.
Not every check starts with a red flag: HMRC's factsheet CC/FS1a confirms some checks are selected at random, so receiving a letter is not an accusation.
Consistency is the protection that actually works. Accurate figures, filed on time, with margins in line with your trade, give Connect less to question. Construction and takeaways have also been HMRC taskforce targets, because cash is harder to trace.
What Triggers a Tax Investigation
Sharp year-on-year changes, high expenses against turnover, and a run of late or amended returns all raise the score. In owner-managed companies, HMRC looks hard at directors' loan accounts and benefits in kind, and an overdrawn loan account triggers a tax charge under Corporation Tax Act 2010 s455. Declared property income is checked against Land Registry, tenancy deposit and letting-agent data; landlords with undeclared rental income can use the Let Property Campaign to put it right. Tip-offs play a part too. HMRC acts on credible reports from the public, former employees and ex-partners.
Understanding HMRC Investigations and Compliance Checks
"Investigation" and "compliance check" get used as if they're the same thing, but the letter tells you which you're in: a general factsheet like CC/FS1a is one thing, COP8 or COP9 another. An aspect enquiry looks at one part of a return; a full enquiry covers the whole return, and sometimes the directors' personal tax affairs too.
COP8 is used for suspected avoidance or a complex technical issue. COP9 is reserved for suspected serious fraud, and gives you access to the Contractual Disclosure Facility, covered in full further down.
What to Expect When HMRC Investigates
How HMRC Notifies You
A Self Assessment enquiry opens by written notice under Taxes Management Act 1970 s9A; a company enquiry follows Finance Act 1998 Schedule 18. Neither is the same tool as Finance Act 2008 Schedule 36, which HMRC uses to require information and documents once the check is under way.
HMRC can make an unannounced inspection visit where a tribunal has approved it under Schedule 36, and a criminal case can begin with a search warrant.
The letter states the tax, period, information wanted and deadline. Read the scope: a question about one VAT quarter isn't a request for three years of records. If you're unsure what it means, that's the point to bring us in: where we're authorised, we review the correspondence, fix the scope, and deal with HMRC directly.
The Five Stages of a Tax Investigation
- Notification. The opening notice sets out scope, period and deadline.
- Information gathering. HMRC asks for records: returns and computations, statements, invoices, payroll, and for cash businesses till rolls and cash books, formalised if needed with a Schedule 36 notice.
- Review and questions. The officer works through what you've supplied and comes back with queries, usually in writing. HMRC cannot compel you to attend a meeting in a civil check.
- Findings. HMRC sets out what it says is wrong, the extra tax, and its view of your behaviour, which sets the penalty band.
- Settlement and closure. Figures are agreed or disputed. An individual enquiry closes by notice under TMA 1970 s28A.
COP9 changes stage two: you must submit the signed CDF acceptance and a valid Outline Disclosure within 60 days of the offer letter.
How Long Investigations Take
There's no standard length. A narrow aspect enquiry with complete records can close quickly; where income has to be reconstructed it runs on, and you can apply to the tribunal for a closure-notice direction. COP8 and COP9 cases run longer, sometimes well beyond a year where offshore accounts are involved.
Your Rights and Responsibilities
What You Must Do
A valid formal information notice is a legal requirement. Miss the deadline and you can be penalised unless you have a reasonable excuse, such as serious illness, bereavement, or records lost in a fire or flood. Keep the records the law requires, don't alter or destroy anything once a check is open, and don't guess: an unsupported figure creates a second problem.
How to Respond to the Letter
Diary the deadline the day the letter arrives, then isolate what's actually been asked and for which period. Handing over more than HMRC requested is a common unforced error.
You can appoint us, or another accountant, tax adviser or solicitor, to act. Where we're authorised, HMRC corresponds with us and can attend meetings in your place. If you can't meet a deadline, ask for more time in writing before it passes. HMRC will usually grant a reasonable request.
Mistakes That Damage Your Position
Silence does the most damage. It removes penalty reduction for cooperation and pushes HMRC toward estimated assessments. Changing records after the check opens, offering figures you can't support, and disclosing one issue while holding back another all cut the mitigation available under Finance Act 2007 Schedule 24. In a COP9 case, an incomplete disclosure withdraws the CDF's protection from criminal investigation.
How Far Back Can HMRC Investigate?
The limit depends on the tax and on why the tax was underpaid. These are the statutory bands.
Tax | Ordinary limit | Careless | Offshore | Serious cases |
|---|---|---|---|---|
Income Tax and CGT | 4 years from the end of the tax year (TMA 1970 s34) | 6 years (s36) | 12 years for qualifying offshore matters (s36A / FA 2019) | Up to 20 years for deliberate behaviour, failure to notify under TMA s7, and specified DOTAS/POTAS disclosure failures (s36(1A)) |
VAT | 4 years (VATA 1994 s77) | No 6-year careless band | The IT/CGT 12-year offshore rule does not apply to VAT | Up to 20 years for s60 dishonest conduct, a fraud conviction, or a s67 failure-to-notify penalty |
Corporation Tax | Own limits under FA 1998 Schedule 18 | Follows the company rules | Follows the company rules | Follows the company rules |
These limits run per tax, so one set of poor records can produce several assessments across different periods. That is why we look at the whole position when we take on an enquiry, not just the first figure in the letter. See HMRC's guidance on assessment time limits for more detail.
Penalties, Interest and Prosecution
Behaviour sets the penalty band. The size of the error does not. Conduct during the check moves you inside that band.
Behaviour | Standard maximum (domestic / Category 1) | What disclosure does |
|---|---|---|
Careless | 30% of the extra tax | An unprompted disclosure to HMRC can take this to 0% |
Deliberate, not concealed | 70% | Falls with telling, helping and giving access to records |
Deliberate and concealed | 100% | Same reductions, from a higher starting point |
Offshore Category 2 | Up to 45% / 105% / 150% by behaviour | Territory category and behaviour both apply. "Offshore" is not automatically 200% |
Offshore Category 3 | Up to 60% / 140% / 200% by behaviour | The 200% ceiling sits here, for the weakest information-exchange territories |
Interest is separate. It runs from the original due date and is not reduced by cooperation.
Most investigations settle civilly, since HMRC recovers money faster that way. Criminal investigation becomes more likely with forged paperwork, a constructed evasion scheme, false statements during the check, or repeat conduct HMRC has already dealt with. Offences include cheating the public revenue, fraudulent evasion of VAT or Income Tax, false accounting, and money laundering on untaxed income. Under COP9, that criminal route stays closed only for conduct you've fully and accurately disclosed.
The Criminal Finances Act 2017 also created corporate offences for failing to prevent the facilitation of tax evasion. A business can be liable where someone acting for it helps a third party evade tax, even if senior management knew nothing about it. The defence is reasonable prevention procedures, documented and in use.
What Happens When the Investigation Ends
Once the closure notice lands, any extra tax is payable on the date stated, whether you agree with the figure or not. That notice converts HMRC's view into a legal position. If you disagree, use the appeal deadline printed on it; don't wait for another letter.
Plenty of checks close with nothing to pay, though you'll still receive written confirmation. Keep it, with the records that supported your position. A closed enquiry into one period doesn't stop HMRC opening a new one into a different period or tax.
You can appeal an HMRC decision within 30 days of the date on it. Before or instead of tribunal, ask for an internal review by an uninvolved officer, or use Alternative Dispute Resolution with an HMRC mediator. Unresolved appeals go to the First-tier Tribunal; a further appeal to the Upper Tribunal is limited to points of law.
COP9, the Contractual Disclosure Facility, and Coming Forward First
The CDF is the COP9 route to a civil settlement in a fraud case: admit the deliberate conduct, disclose it in full, pay the tax, interest and penalty, and HMRC agrees not to pursue a criminal investigation into what's disclosed. The Outline Disclosure doesn't need final figures on day one, but it must be valid and arrive with the signed acceptance inside 60 days.
Disclosing first, before HMRC contacts you, puts you in a better penalty position than waiting for the letter. Getting it right matters more than sending it quickly. This is the work our team does when a client arrives after a previous accountant has left errors in the accounts: establish what needs correcting, organise the records, and deal with HMRC as agent.
Questions HMRC Typically Asks
The officer works from your bank statements outwards. The usual first question is where a deposit came from when it doesn't match an invoice: trading income, a loan, a gift, or a transfer between your own accounts. You'll also be asked to explain inconsistent entries: an invoice with no matching payment, a round-sum expense claim, drawings that don't cover living costs, and, in cash-heavy trades, how takings are recorded, banked and kept separate from personal spending.
In a criminal investigation, interviews under caution follow the Police and Criminal Evidence Act 1984 (PACE) Code C. They're audio-recorded, you're entitled to legal representation, and a caution is given before questioning starts.
Speak to Us Before You Reply
If you've received an investigation letter, you don't have to work through it alone. We review what HMRC is asking for, set out what the scope actually is, and, where we're authorised, manage the correspondence.
Get in touch and share the details of your HMRC letter. The sooner we can see the scope, the cleaner the response.
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