What is an HMRC tax investigation?

HMRC has the right to check your business finances at any point to ensure you’re paying the right amount of tax. If your business is selected, you’ll receive an HMRC investigation letter or phone call in which they’ll tell you what they want to look at. This might include things like:

the tax that you pay
your accounts and tax calculations
your Self-Assessment Tax Return for a given year
your Company Tax Return
your PAYE records and returns if you’re an employer
your VAT return and records if you’re VAT-registered

If you use an accountant, HMRC may contact them instead of you, but your accountant should advise you about it.

The three types of tax investigation

There are three different levels of audit that HMRC can carry out:

1. Full enquiry

During a full enquiry, HMRC will review the entirety of your business records, because they believe that there is a significant risk of an error in your tax. When investigating limited companies, they may look closely into the tax affairs of company directors as well as the affairs of the business itself.

2. Aspect enquiry or Compliance Check

As the name suggests, during an aspect enquiry HMRC will look at a particular aspect of your accounts, such as inconsistencies in a section of a recent tax return.

3. Random check

Random checks can happen at any time, regardless of the state of your accounts or whether you’ve triggered an alert.

What triggers a tax investigation?

Any unusual activity in your tax records or accounts could flag you up for an HMRC tax compliance check.

Most checks are triggered by HMRC’s Central Risk team, who use sophisticated data mining tools to spot unusual activity on accounts or trends in your industries. They will compare data received from many sources but the most common trigger for an investigation is submitting incorrect figures on a tax return – so it’s worth asking an accountant to offer professional advice about your accounts and check over your tax returns before you send them.

Other triggers include:

your industry is seen as ‘high risk’ (e.g. if there are a lot of ‘cash in hand’ transactions)
someone alerting HMRC to unusual activity in your accounts
noticeable inconsistencies between tax returns (e.g, a big fall in income from one year to the next)
frequently filing tax returns late
your accounts not matching the industry norms

Your accounts may simply be selected at random for investigation, even if your books are in order and you always file tax on time.

What does a tax investigation procedure involve?

During the investigation, a team from HMRC will audit your accounts and ask you a number of questions. They might ask to visit you in person at your home, business address or at your accountant’s office.

How far back can HMRC go during an investigation?

Section 37 of the Limitation Act (1980) (1980) states that there is no time limit for HMRC to pursue tax debt once they begin an enquiry. Recovering unpaid tax is seen as being in the public interest, therefore its recovery doesn’t follow the same time restrictions as other types of debt.

The Act does state that recovering unpaid National insurance contributions (NIC) can only be done for 6 years.

Although there is no time limit for debt recovery, HMRC can’t randomly investigate through decades of tax returns for any company on a whim. They must have a genuine reason for investigating, and they must begin an enquiry within 12 months of the date a tax return was filed. Once the enquiry begins, they can dig deeper into your files indefinitely.

HMRC’s investigations can only go back a certain amount of time based on how serious the situation is :

Genuine mistakes – investigate back 4 years.
Carelessness – investigate back 6 years.
Offshore matters/offshore transfers – investigate back 12 years.
Deliberate tax evasion – investigate back 20 years.

HMRC can reclassify the case severity if new evidence comes to light during the investigation that you were taking deliberate measures to avoid tax. This means they can go further back to search for more unpaid tax.

How long before HMRC debt is written off?

Unlike other types of debt, HMRC debt cannot be written off.

HMRC have authority to recover the debt in a variety of ways:

Instructing bailiffs/debt collection agencies to come to your home.
Applying for a County Court Judgment (CCJ), allowing bailiffs to seize goods, etc.
Direct earnings attachment – contacting your employer and arranging for money to be deducted from your monthly pay.
Begin bankruptcy proceedings against you.

You should seek legal advice as soon as possible to help you negotiate a better deal with HMRC, such as setting up a “Time to Pay” arrangement, allowing you to spread payments over a longer period of time.