The only HMRC investigation that would be initiated against a self-employed person is an HMRC tax investigation, and for more than 93% of cases, this is done when HMRC has evidence of tax fraud. Like any other organisation, they have limited resources, and wasting them results in functional bottlenecks. This means that a simple mistake on a self-assessment tax return is not enough to warrant an investigation.
But what circumstances are likely to lead to an investigation? In this article, we outline the common triggers for an HMRC tax investigation, including signs to look for, what they entail plus the information you need to protect yourself from disruption.
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What are the triggers for an HMRC tax investigation?
It’s worthwhile pointing out that HMRC tax investigations can be done at random, typically around 7% of cases. Still, the overwhelming majority of the time, they need to see a red flag in the data they gather or receive from third parties.
These red flags consist of the following:
- Numerical anomalies on the tax return – Substantial variations highlighted via data analysis can be a cause for investigation. This can be anything that suggests a high likelihood of underhanded tax evasion. Such as potential undeclared income being detected through a significant profit swing compared to the previous year, or earning a gross profit margin outside of industry norms that hints at cash skimming.
- Mismatches between third-party data and the tax return – HMRC receives information from banks and other organisations all the time. If they see a discrepancy in what is declared and what is taken, this can be enough to trigger an HMRC tax investigation. It’s not just the banks they speak to, but also land registrars, the DVLA and even crypto exchanges (for crypto selling only).
- Filing-behaviour triggers – Committing several late returns, payment surcharges or amendments to a single return can trigger an investigation, alongside high return claims and repeated filings of singular tax returns. For honest mistakes, you may find yourself paying additional tax or receiving warnings/fines.
- Sector- and scheme-based campaigns – These are what HMRC considers “high-risk industries”, meaning the trades work heavily with cash, meaning there are fewer paper trails to work off of. This is hit often with checks, which means it’s best to keep reported income and expense receipts for all cash transactions.
- External intelligence – External intelligence means “tip-offs”, meaning someone has informed on a person committing tax avoidance or otherwise. This can be anyone from a PAYE employee to a disgruntled ex-partner. This alone isn’t enough to kickstart an HMRC tax investigation; first, the information has to be cross-referenced for corroboration before action is taken.
- Random checks – HMRC sets aside about 7% of enquiry cases for pure random checks.
Mistakes can cause a trigger, and the bigger a business is, the more capacity there is for failure. Consider hiring a professional accountant to file the business or company tax return each year to ensure you don’t run afoul of tax law and regulations too often.
What Are The Different Types Of HMRC Investigations?
Depending on the reason for the investigation, HMRC will either carry out one of the following two types of enquiry:
- Full enquiry – These investigations are reserved for those who HMRC believes, based on substantial evidence of suspicious activity, have violated tax law. They will delve deep into businesses and their records, and HMRC might ask for additional supporting documents.
- Aspect enquiry – This type of enquiry focuses on a specific aspect of your financial records, likely in response to detecting a mistake. This tax investigation is short and sweet, concerning itself with rectifying the incorrect or missing details.
What Happens In A HMRC Investigation?
Should a HMRC tax investigation be launched into your business, you’ll simply need to be prepared. When a full investigation is launched, all of your financial information will be examined, but with an aspect enquiry, only one small part will be scrutinised.
HMRC may request access to:
- Your complete business account records, including details of tax calculations
- Sales invoices
- Bank statements
- Legal documents
- Documentation of paid taxes
- Your self-assessment tax returns
- Full details of expenses incurred with attached receipts
- PAYE records (if applicable)
HMRC will contact you when they believe an issue has occurred with your self-assessment. This investigation will then determine if the mistake was honest or a deliberate manipulation. They’ll tell you exactly what information they need from you – or your accountant, if you have one – and then you simply follow their requests.
If the mistake was honest, there should be no consequences. They may also request further information to clarify any discrepancies or unusual activities in your financial records. HMRC may visit your business address during the investigation.
How Do I Know If HMRC Are Investigating Me?
If you are under investigation, you will be told as soon as possible so that you have time to gather the evidence. Unlike other criminal matters, evidence cannot so easily be gotten rid of. The absence of vital documents that you are obligated to have is, in and of itself, a violation of the law.
You will receive a letter detailing the enquiry type alongside a request for the necessary documentation. This could be anything from your bank statements and sales invoices to transaction receipts and business expenses. In some cases, HMRC may issue an information notice to request specific documents or details needed for the investigation. Meetings with HMRC inspectors can also be held at the taxpayer’s accountant’s office.
If you have an accountant, they too will receive notification, so they can start preparing the relevant documents for the investigation. This might involve permission to access accounting or business software used to record business information so that HMRC can view the records digitally and move the investigation along quickly.
How Long Does an HMRC Investigation Take?
Depending on the type of enquiry, an HMRC tax investigation can run anywhere from a few days to a couple of months. The information requested will usually have a bearing on how long the process will take. The process can be time-consuming, especially if extensive documentation and detailed reviews are required.
HMRC can conclude in several ways. For minor, unintentional violations of tax regulations, a warning may be given. In cases of clear violation, the tax investigation will end in the business being charged a proportionate fine on top of the outstanding tax. In some cases, you may also be required to pay any outstanding tax liability identified during the investigation.
HMRC may deliver penalties if they:
- Find consistent errors in the account sheets and business records (even if it was unintentional)
- Prove deliberate omission of important information on tax return documents
- Confirm an attempt to conceal income
A criminal charge of tax fraud may be sought if the sole trader has consistently and deliberately evaded tax, but this is usually reserved for the most extreme cases. Most times, a hefty fine will suffice.
Business owners can appeal HMRC’s decision within 30 days of the conclusion of the investigation should they disagree with their findings.
If found guilty, HMRC may insist upon periodic checks of your financial records to ensure you are filing accurate tax returns and you are fully aware of your responsibility as a business owner.
Do HMRC Always Investigate Tip-Offs?
When do HMRC investigate self employed about tips? There will always be a preliminary check to see if there is enough there to corroborate what the tip has alleged, but unless they already have their suspicions, they won’t go any further.
When checking the validity of a tip-off, HMRC will usually look over assessments and tax returns previously filed to ensure they stack up.
If HMRC finds a discrepancy, then an investigation process, like the ones we’ve discussed above, may follow.
Do HMRC Do Random Checks?
HMRC do carry out random checks and audits on different sole traders and businesses each year, but with so many business owners in the UK, the chances of your business being selected are quite slim. However, businesses that present a significant risk due to discrepancies or unusual activities in their tax records are more likely to be selected for random checks. Taxi drivers, along with other self-employed individuals, are often under scrutiny due to the nature of their income reporting.
With that said, you should always be prepared and ensure your financial records are all up to date to avoid complications if you are chosen.
Conclusion
As a business owner, you must get your self-assessment right. Tax laws exist to prevent money laundering, tax avoidance and many other issues that can get in the way of the government receiving revenue used to fund public services. We recommend hiring an accountant or a tax advisor as your business develops, as it can become incredibly hard to keep up after a certain level.
Whatever you decide to do, you should find comfort in the fact that HMRC don’t actively try to catch honest business owners out. You need only fear HMRC investigations if your tax affairs are not strictly above board.
