An HMRC tax investigation, which HMRC formally calls a compliance check, can be triggered by specific risk indicators, by information HMRC receives from other sources, or as part of routine sampling, so not every check means HMRC suspects wrongdoing. For a personal Self Assessment return filed on time, HMRC normally has 12 months from the date the return was delivered to open an enquiry under section 9A of the Taxes Management Act 1970. Where an error is found, HMRC can go back 4 years as standard, 6 years for careless behaviour and up to 20 years for deliberate behaviour. Penalties for inaccuracies range from 0% to 100% of the extra tax due depending on the behaviour involved, and any additional tax is usually payable within 30 days with interest. Whatever the trigger, responding properly takes professional time, which is exactly what tax fee protection is designed to cover.
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If you or your accountant receive a letter from HMRC, the first question is almost always the same: why me? This guide explains what tends to prompt a check, how HMRC opens one, how far back it can reach and what it can cost, all confirmed against HMRC and legislation sources.
What actually triggers an HMRC tax investigation?
HMRC checks tax affairs to make sure people are paying the right amount. According to HMRC, a check can look at any taxes you pay, your accounts and tax calculations, your Self Assessment or Company Tax Return, and your PAYE records if you employ people. A check can be opened for a single specific reason or across several areas at once.
Does HMRC use data to select cases?
Yes. HMRC receives large volumes of information from third parties such as banks, employers, letting agents, online platforms and overseas tax authorities, and it cross-references that data against what taxpayers report. A mismatch between reported income and information HMRC already holds is one of the most common reasons a case is opened. Some contact begins gently, for example through a prompt to check your return. If you have received one of these, our guide to HMRC nudge letters explains what they mean and how to respond.
What are the common red flags?
Typical risk indicators include figures that fall outside the norm for a trade or sector, sharp or unexplained changes in profit, regular losses, large or round-sum expense claims, undeclared income such as rental or online earnings, and inconsistencies between different returns. None of these guarantees a check, and an honest, well-documented return is your best protection.
How does HMRC open an investigation?
Most checks begin with a letter. HMRC contacts you or your agent to explain what it wants to review and what information it needs. If you would like to know what that first letter looks like and what it is asking for, read our explainer on the HMRC compliance check letter.
For a personal Self Assessment return delivered on or before the filing date, HMRC generally must give notice of enquiry within 12 months of the day the return was delivered, under section 9A of the Taxes Management Act 1970. Outside that window, HMRC can still act using discovery powers where the conditions are met, which is where the extended time limits below become relevant.
Worried about an HMRC check?
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How far back can HMRC go?
The reach of a check depends on the behaviour behind any error. HMRC can assess:
- 4 years from the end of the relevant tax period as the ordinary limit;
- 6 years where the loss of tax is due to careless behaviour;
- 12 years for certain offshore matters involving income tax, capital gains tax or inheritance tax;
- 20 years where the loss of tax is due to deliberate behaviour, or in certain failure to notify cases.
Because a deliberate error can open two decades of records, the potential scope of a serious case is significant. Our guide on how far back HMRC can go covers these limits in more detail.
What penalties can apply?
Where HMRC finds an inaccuracy, penalties are based on the behaviour involved and calculated as a percentage of the extra tax due. HMRC’s published ranges are 0% to 30% for a careless inaccuracy, 20% to 70% where the error is deliberate but not concealed, and 30% to 100% where it is deliberate and concealed. Penalties can be reduced by telling HMRC promptly, giving full help and allowing access to records. Any additional tax is normally payable within 30 days, with interest charged from the date the tax was originally due. If you took reasonable care, no penalty is due for a genuine mistake.
What happens in suspected fraud cases?
Where HMRC suspects deliberate tax fraud, it may offer a civil route under Code of Practice 9 through the Contractual Disclosure Facility, rather than pursuing a criminal investigation. Under that facility a taxpayer has 60 days to make an outline disclosure of deliberate conduct. These are serious matters and specialist advice is essential.
Where cover fits
Even a routine compliance check can involve considerable correspondence, meetings and analysis, and those professional fees are payable whether or not any extra tax is ultimately found. Tax fee protection, also known as tax investigation insurance, is designed to meet the accountant’s professional fees for defending an eligible HMRC check, so the focus stays on resolving the matter rather than on the cost of the response. You can read more in our overview of what tax fee protection insurance is and how it works.
If you would like to understand how cover could apply to your circumstances, you can get a quote or contact us to talk it through. Accountants looking to offer protection to their clients can find out more about our accountant scheme.
This article is general information about UK tax administration and does not constitute tax, legal or financial advice. Always seek professional advice on your own situation.
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