You’ll likely know about HMRC (His Majesty’s Revenue and Customs) if you’re a UK taxpayer. As well as being responsible for collecting taxes, they also carry out HMRC investigations into individuals and businesses when something seems amiss or they have received information from an interested party. This blog explains what can trigger an HMRC investigation, how long these tax enquiries typically last, and what the process might cost.
What Triggers an HMRC Investigation?
An HMRC tax investigation is often triggered by specific factors or behaviours that raise suspicions about the accuracy, completeness or honesty of your personal or business tax returns. Common triggers include:
- Inconsistent reporting: Significant fluctuations in income or expenses without a clear explanation can draw attention.
- Cash transactions: Operating a cash-intensive business or failing to account for cash transactions properly can be a red flag to HMRC investigations.
- Offshore accounts: HMRC is increasingly focusing on offshore income and assets, so failing to declare these can lead to an investigation.
- Discrepancies in lifestyle and income: If your lifestyle exceeds your declared income, HMRC may question whether you’re underreporting your earnings.
- Regular tax return errors: Repeated mistakes, even if unintentional, can mark you out as one to watch.
- Tip-offs: These are usually from disgruntled ex-employees or competitors.
Another factor that may increase your risk of an HMRC investigation is the industry you work in. Certain sectors, particularly those that deal largely in cash such as restaurants and bars, are seen as higher risk when it comes to potential tax evasion or fraud.
Finally, any noticeable change in your lifestyle (like purchasing a luxury car or property) without a corresponding increase in declared income might prompt HMRC to take a closer look at your finances.
What’s the Difference Between a Tax Investigation and an Audit?
While they are related, a tax audit and an HMRC tax investigation aren’t quite the same.
A tax audit involves checking financial records to ensure that a business is complying with UK tax laws. It usually focuses on confirming that income, expenses, and credits are accurately reported and filed on time.
By contrast, an HMRC investigation is more in depth. It’s typically triggered when there’s suspicion of intentional tax evasion or fraud. Rather than simply reviewing paperwork, the goal of a tax investigation is to uncover and recover any unpaid tax from previous years by thoroughly examining potential compliance failures.
For example, an audit might look at whether your business’s expense claims were justified, whereas a tax investigation would dig deeper into whether you deliberately manipulated your records to understate your earnings. An investigation might involve a tax inspector visiting your premises and purchasing items secretly to examine contents, likely markups etc.
How Long Do HMRC Investigations Take?
There’s no fixed timeline for an HMRC investigation. The length of time depends on the complexity of the case, the nature of the enquiry, and how responsive you are to any requests for information.
Simple investigations involving minor discrepancies or one-off errors can often be resolved within a matter of weeks. However, more serious HMRC tax investigations – especially those involving suspected fraud – can stretch over months, or even years.
HMRC typically conducts three types of investigations:
- Full enquiries: These are the most comprehensive, involving a full review of your financial records and tax returns for a given year.
- Aspect enquiries: These are more limited, focusing on a specific part of your tax return where HMRC believes something may be wrong.
- Random enquiries: These are chosen at random, although HMRC often uses risk-based selection models to decide who to investigate.
As a rough guide, an aspect enquiry might take a few months to resolve, whereas a full enquiry could easily take a year or more – particularly if it goes to tribunal or involves disputes.
How Much Does an HMRC Tax Investigation Cost?
The cost of an HMRC investigation can vary significantly, but it’s rarely cheap. Even if the investigation is straightforward, it can be stressful and time-consuming.
Total costs depend on several factors including the complexity of the case, how long the investigation takes, and whether you need to bring in professional help. Accountants, tax advisors, and legal experts can all be part of the process, and their fees can quickly add up. For more complex cases, the costs can run into several thousands of pounds.
In addition to professional fees, you may also need to pay backdated tax, interest, and possibly penalties if HMRC finds you owe more than you declared.
It’s worth noting that these investigations can be particularly disruptive for businesses, especially smaller firms without dedicated finance teams. This is why having tax investigation insurance and professional advice from the outset can make a big difference.
Final Thoughts
By understanding what triggers HMRC investigations and making sure you submit accurate, timely tax returns, you can greatly reduce the risk of being targeted. However, no business is completely immune from scrutiny, especially if you operate in a high-risk sector.
Using a Chartered Accountant to prepare and file your tax returns reduces the chances of there being errors and reduces the likelihood of HMRC asking questions (compared to if you do them yourselves).
If you do find yourself facing an HMRC tax investigation, getting the right support early can significantly reduce stress and cost. At 360, we offer a wide range of tax services, including support with tax planning, VAT, self-assessment, and HMRC investigations. We also offer tax investigation insurance, which covers our fees for defending you (providing there’s no evidence of deliberate fraud).
We’re here to provide clear, practical tax advice to both individuals and businesses. To find out more, contact us today.
