HMRC Investigation: What Triggers One and How to Protect Yourself

How HMRC selects returns for investigation

HMRC uses a sophisticated data-matching system called Connect. It cross-references your tax return against data from banks, Land Registry, Companies House, HMRC's own PAYE and VAT records, and — increasingly — social media and online marketplaces.

Common triggers for an HMRC enquiry include:

Income discrepancies: Your reported income is significantly lower than your bank deposits, or lower than comparable businesses in your sector.

High expense ratios: Your business expenses are an unusually high proportion of your income — for instance, claiming expenses that are 90% of revenue when similar businesses average 50-60%.

Repeated significant year-on-year income drops: Particularly if other data (mortgage applications, lifestyle indicators) suggests income is higher than reported.

Missing returns or late filing: Late filing places you in a higher-risk category for random selection.

Operating in a high-risk sector: HMRC publicly announces its focus sectors. Cash-intensive businesses, online marketplaces, and construction have historically been high on the list.

Random selection: A proportion of investigations are random — no specific trigger required.

Types of HMRC enquiry

Aspect enquiry: HMRC is questioning one specific aspect of your return — usually a particular expense claim or income figure. Lower risk, more easily resolved with documentation.

Full enquiry: HMRC is reviewing your entire return. Higher risk and more time-consuming.

Code of Practice 9 (COP9): The most serious level — used where HMRC suspects deliberate fraud. A COP9 investigation involves Contractual Disclosure Facility and is extremely serious.

What happens during an enquiry

HMRC will write to you (or your agent) opening the enquiry and specifying what they want to see. Typical requests include:

• Business bank statements for the period
• Receipts and invoices supporting expense claims
• Mileage logs
• Contracts and invoices for the income claimed
• Details of how profit figures were calculated

You normally have 30 days to respond. Extensions are usually granted on request.

The enquiry is either resolved by agreement (you accept any adjustments and pay any tax owed) or proceeds to appeal. Most enquiries are resolved within 3-12 months.

The best protection is clean records

An HMRC enquiry is not automatically a problem if your records are accurate and complete. The issue arises when:

• You cannot produce receipts for expenses claimed
• Your records do not reconcile to your bank statements
• You have claimed expenses that are partly or wholly personal
• Your income records are incomplete or inconsistent

A bookkeeper who reconciles your accounts monthly, attaches receipts to transactions, and produces a clean Profit and Loss is providing a direct protection benefit — not just an accounting service.

HMRC investigation insurance

Many sole traders take out HMRC investigation insurance (sometimes called tax investigation insurance or fee protection insurance). This covers the professional fees your accountant charges for dealing with the enquiry. Annual premiums are typically £100-£250. Some professional bodies and accountancy practices offer this as part of their service packages.

The insurance does not cover any additional tax owed — only the fees of dealing with the investigation.

If you have made an error

If you realise you have made an error on a past return — overclaimed an expense, underdeclared income — the right approach is to disclose this voluntarily to HMRC before they discover it themselves. Voluntary disclosure typically results in significantly lower penalties than if HMRC uncovers the error independently.

Your bookkeeper or accountant can help you make a disclosure through the appropriate HMRC channels and negotiate a reasonable settlement.