Navigating the complexities of tax compliance is a challenge for any business, and the risk of an HMRC enquiry is a concern that no business owner can ignore.
HMRC tax investigations into individuals and small businesses have risen significantly in recent years, with 248,000 cases opened in 2022/23 compared to 232,000 the previous year.
Whether triggered by discrepancies in your tax returns, industry-specific risks, or even random selection, an enquiry can be both time-consuming and stressful.
Understanding what factors increase the likelihood of an enquiry and how HMRC operates can help you minimise risk and prepare your business to handle any scrutiny with confidence.
In this guide, we’ll explore the key risk factors, share practical tips to reduce your exposure, and discuss HMRC’s approach to compliance checks.
Risk Factors That May Trigger an Enquiry
There are a variety of factors that can result in HMRC starting an enquiry into you and/or your organisation. We can generally break these down into six areas:
- Significant variations in income or expenses between tax years
- High expense claims relative to industry norms
- Late filing of tax returns or payments
- Discrepancies between different tax returns (e.g., VAT vs Income Tax)
- Information, tips or reports from third parties
- Operating in high-risk sectors
Regardless of the reason behind the enquiry, however, HMRC will delve into your financial records until they are satisfied with their findings.
How To Minimise Enquiry Risk
Reducing the risk of an HMRC enquiry starts with maintaining excellent financial practices and information. Accurate and complete documents and records are essential, as are timely submissions of tax returns and payments.
Consistency across your filings is also key—discrepancies between different returns, such as VAT and income tax, can raise red flags.
It’s also wise to keep detailed supporting documentation for all claims, so you can quickly respond to any questions from HMRC. For complex matters, professional tax advice can provide valuable guidance and reduce the risk of errors (and in-turn penalties).
HMRC Enquiry Statistics
HMRC conducts tax enquiries to ensure compliance, selecting cases both randomly and based on information including from risk assessments.
Only a small proportion of tax returns are selected for a full enquiry purely at random, and it’s more common for HMRC to specifically start an enquiry based on certain reasoning and beliefs (as per the factors highlighted above).
Percentage Of Businesses Subject To Enquiries Annually
In the 2022/23 financial year, HMRC opened 299,000 tax enquiries, a notable increase from 247,000 in 2020/21.
For mid-sized businesses, 20% reported being subject to an HMRC enquiry, inspection, or investigation in the past five years, with 6% experiencing one in the last 12 months.
Among large businesses, HMRC actively investigates around half of the UK’s largest businesses at any given time.
These figures highlight that while the overall risk of an enquiry remains relatively low, it increases significantly for larger or more complex businesses.
Does HMRC Have A Formal Checking Policy?
1. Risk-Based Approach
HMRC focuses on areas with the highest risk of error or non-compliance. This includes:
- Industries prone to non-compliance, such as construction or hospitality.
- Large or inconsistent entries in tax returns.
- Frequent errors, late submissions, or discrepancies.
- Claims for high-value or complex reliefs, like R&D tax credits.
- Businesses with a history of non-compliance.
Their advanced Connect system analyses data from multiple sources to identify potential risks.
2. Random Checks
HMRC also conducts random compliance checks to ensure fairness and maintain compliance across all businesses. Even fully compliant businesses can be selected for review.
3. Sector-Specific Compliance Campaigns
HMRC often targets specific sectors, such as construction or VAT-heavy industries, through compliance campaigns.
4. Commitment to Compliance
While HMRC doesn’t guarantee every business will face a check, their long-term goal is to increase compliance through education, proactive error correction, and targeted reviews.
Being Prepared For A HMRC Enquiry
An HMRC enquiry can be daunting, but understanding the factors that trigger one and how HMRC operates can help you stay prepared.
With tax investigations on the rise, especially for businesses in high-risk sectors or those with complex filings, it’s more important than ever to maintain accurate records and ensure compliance.
While the overall likelihood of an enquiry is low, taking proactive steps to minimise risk is essential. Staying organised, consistent, and transparent can go a long way in protecting your business.
At Pulse Accountants, we specialise in supporting businesses through HMRC enquiries, offering expert guidance to help you navigate the process with confidence.
Pulse Accountants Tax Investigation Insurance
Facing an HMRC enquiry doesn’t have to be overwhelming. With Pulse Accountants’ Tax Investigation Insurance, you can rest assured knowing that expert support is just a phone call away.
Our insurance covers the costs of professional representation during an enquiry, ensuring your business is fully protected. From handling HMRC communications to providing tailored advice, we’ll be by your side every step of the way.
Don’t leave your business exposed—contact Pulse Accountants today to find out how our tax investigation insurance can safeguard your peace of mind and protect your business.
