What Is a Tax Investigation?
A tax investigation is HMRC's examination of your business's tax affairs. Learn what triggers them, what to expect, and how to protect yourself.
Key Takeaways
- HMRC opens tax enquiries both randomly and in response to specific risk signals
- A full enquiry examines all aspects of a return; an aspect enquiry focuses on specific items
- Never respond to HMRC without taking professional advice first
- Fee protection insurance covers accountant fees during a tax investigation
What a tax investigation is
A tax investigation (or enquiry) is a formal examination by HMRC of your tax returns to check they are complete and accurate. HMRC can open an enquiry into any tax return — corporation tax, VAT, income tax, or PAYE — within 12 months of the filing date, or longer if HMRC suspects fraud or careless errors. Enquiries can be routine (selected randomly) or targeted (triggered by a specific concern).
Types of enquiry
A full enquiry means HMRC wants to examine all aspects of the tax return — a comprehensive review. This is typically opened when HMRC has broader concerns about accuracy. An aspect enquiry is focused on one specific area — a particular expense category, an R&D claim, or a specific transaction. A VAT inspection reviews your VAT records and returns — often a routine compliance check rather than an indication of suspected wrongdoing.
What triggers an enquiry
While HMRC selects some enquiries randomly, most are triggered by risk signals: significant year-on-year fluctuations in revenue or profit unexplained by economic conditions; high expense ratios particularly above industry norms; inconsistencies between different tax returns (VAT turnover not matching corporation tax return); large R&D tax credit claims (HMRC has significantly increased scrutiny here); and sector-specific risk campaigns targeting industries HMRC believes have systematic underpayment.
How to respond
Never respond to an HMRC enquiry notice without first taking professional advice. Your accountant or tax adviser should manage all communication with HMRC. They understand what information HMRC is entitled to request and ensure responses are accurate and appropriately scoped. Providing more information than requested can open up new areas of enquiry. A professional adviser will ensure you provide what is required — no more and no less.
Fee protection insurance
Tax investigation insurance covers the professional fees of your accountant during a tax enquiry — which can easily run to thousands of pounds for a prolonged investigation. Many accountants offer this as an annual bolt-on, typically costing £200-500 per year. Given the random element of HMRC enquiry selection, fee protection is worth considering regardless of your confidence in your tax compliance — the potential saving if an enquiry occurs is substantial.