HMRC Tax Investigation What To Expect

HMRC may open an enquiry into a self-assessment return within 12 months of the filing date, or issue a discovery assessment if they believe tax has been under-declared. The investigation typically begins with a letter requesting specific information or records. HMRC has powers to issue information notices requiring the production of documents within a specified timeframe. The process may involve meetings, requests for bank statements and business records, and potentially visits to business premises. Investigations can take several months to several years depending on complexity. If underpaid tax is found, HMRC will typically seek the tax due plus interest and may also charge penalties based on the reason for the underpayment, ranging from careless errors to deliberate evasion.

Common situations include: receiving an enquiry letter about a specific entry on a tax return, HMRC opening a full enquiry into all aspects of tax affairs, a compliance check triggered by discrepancies between reported income and lifestyle, an investigation into a business following an anonymous tip-off, and HMRC querying figures that appear inconsistent with industry norms.

HMRC's enquiry powers are set out in Section 9A of the Taxes Management Act 1970, which allows HMRC to open an enquiry into a self-assessment return. Section 29 covers discovery assessments where HMRC believes insufficient tax has been assessed. Schedule 36 of the Finance Act 2008 gives HMRC the power to issue information notices requiring the production of documents and information. Penalties for inaccuracies in returns are governed by Schedule 24 of the Finance Act 2007, with penalty rates depending on whether the error was careless (up to 30 percent), deliberate (up to 70 percent), or deliberate and concealed (up to 100 percent). These penalties may be reduced for cooperation and unprompted disclosure.

People facing an HMRC investigation often consider seeking professional advice from a tax advisor or accountant with investigation experience, responding promptly and accurately to information requests, making an unprompted disclosure of any errors which may reduce penalties, understanding their rights including the right to appeal HMRC decisions, and checking whether their professional indemnity insurance or accountancy fee protection policy covers investigation costs. Cooperation with HMRC is generally considered to result in lower penalties than non-cooperation.

Common mistakes include: ignoring HMRC correspondence which may lead to formal information notices and potential penalties for non-compliance, providing inaccurate or incomplete information which can escalate the investigation, not seeking professional advice early in the process, failing to keep adequate records which makes it difficult to demonstrate compliance, and not understanding the difference between penalties for careless errors versus deliberate concealment.