preparing for a tax investigation
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Feb 12 2026

Preparing for a Tax Investigation: What Businesses Need to Know

Receiving a letter from HM Revenue & Customs (HMRC) announcing a tax investigation, often called a compliance check or enquiry, can be daunting for any small business owner. It signals that HMRC wants to verify whether you’re paying the correct amount of tax, and the process can involve detailed scrutiny of your records, potentially leading to adjustments, penalties, or even interest on underpaid amounts. At Jan McDermott Chartered Accountants based in Wirral, we regularly support owner-managed businesses, sole traders, partnerships, limited companies, start-ups, and property landlords across the UK in navigating these challenges. With our expertise in tax planning, compliance, corporation tax, VAT returns, and Tax Investigation Insurance, we’ve helped clients respond effectively and minimise disruption. In this guide, we’ll outline what a tax investigation entails, common triggers, how to prepare, and steps to take if one occurs, all tailored to help small businesses stay compliant and confident. 

Understanding HMRC Tax Investigations

HMRC has the authority to check your tax affairs at any time to ensure accuracy and compliance. These checks can range from a simple query about a specific item on your return (an “aspect enquiry”) to a full review of your entire financial records (a “full enquiry”). In some cases, investigations are random, around 7% are selected without any specific trigger, but most arise from data mismatches or red flags in HMRC’s sophisticated systems. 

The process typically begins with an official letter (or sometimes a phone call) explaining what HMRC wants to examine, such as your Self-Assessment, Corporation Tax return, VAT submissions, or PAYE records. They may request documents, bank statements, invoices, receipts, or even request a visit to your business premises, home, or your accountant’s office. Investigations can last from a few months for limited scopes to much longer for complex cases, with no strict time limit on completion, though HMRC generally has up to 12 months from filing (or longer if deliberate errors are suspected) to open an enquiry. 

Outcomes vary: no further action if everything checks out, adjustments to your tax position with interest and possible penalties, or, in rare serious cases, referral for criminal investigation. Penalties can reach up to 100% of underpaid tax for deliberate errors, though HMRC often applies lower rates for careless mistakes or voluntary disclosures. 

hmrc tax

Common Triggers for Investigations in Small Businesses

HMRC uses data-matching across sources like bank records, third-party information, and industry benchmarks to spot inconsistencies. For small businesses, the most frequent triggers include: 

  • Discrepancies or large fluctuations: Sudden drops in reported income, sharp increases in expenses, or figures that deviate significantly from previous years or industry norms. 
  • Errors or inconsistencies in returns: Mistakes on tax returns, such as incorrect categorisation of expenses, underreported income, or mismatches between VAT, PAYE, and Self-Assessment filings. 
  • Late filings or payments:  Persistent delays in submitting returns or settling tax bills raise suspicions of potential issues. 
  • High-risk sectors or practices: Businesses in industries prone to cash transactions (e.g., construction, hospitality) or those with unusually high expense claims relative to turnover. 
  • Tip-offs or third-party data: Reports from informants, or data from banks, suppliers, or platforms showing unreported income. 
  • Lifestyle mismatches: Declared low profits contrasting with visible spending or asset purchases. 

In our experience at Jan McDermott Chartered Accountants, many investigations stem from innocent oversights amplified by poor record-keeping, issues we help prevent through proactive compliance and accurate bookkeeping. 

 

How to Prepare Before an Investigation Occurs

The best defence is strong, ongoing compliance. Here’s how small businesses can fortify themselves: 

  1. Maintain meticulous, up-to-date records Keep all receipts, invoices, bank statements, contracts, and correspondence organised and accessible, ideally digitally. HMRC can request records going back several years (typically four to six). Use cloud accounting software like Xero, where we’re certified advisors, to attach documents directly to transactions and ensure real-time accuracy. 
  2. Separate personal and business finances Mixing accounts is a common red flag. Use dedicated business bank accounts and credit cards and document any reimbursements clearly. 
  3. File accurately and on time Double-check returns before submission and consider professional review. Our team handles corporation tax, VAT, payroll, and Self-Assessment to minimise errors. 
  4. Consider Tax Investigation Insurance at Jan McDermott Chartered Accountants, we offer Tax Investigation Insurance as part of our services. This covers professional fees if HMRC opens an enquiry, providing peace of mind and expert representation without unexpected costs. Many clients find this invaluable, especially for full enquiries. 
  5. Conduct regular internal reviews Reconcile accounts monthly, review expense claims against HMRC guidelines, and monitor for anomalies. Our Virtual FD and management accounts services provide ongoing oversight and forecasting to spot issues early. 
  6. Stay informed on compliance changes With Making Tax Digital and evolving rules, keep abreast of requirements. We offer tailored advice and training to ensure your setup remains compliant. 
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What to Do If You Receive an Investigation Notice

Don’t panic, act promptly and professionally: 

  • Read the letter carefully: Note the scope (aspect or full), requested information, and deadlines. 
  • Don’t respond alone if unsure: Contact your accountant immediately. At Jan McDermott Chartered Accountants, we handle HMRC correspondence, gather documents, and represent clients to ensure accurate, complete responses. 
  • Gather and organise documents: Provide exactly what’s requested, no more, no less. Use secure methods and keep copies. 
  • Be honest and cooperative: Prompt, clear replies can lead to quicker resolution and more lenient outcomes. 
  • Seek specialist support: If the investigation escalates, professional representation is crucial. We liaise directly with HMRC, drawing on our experience to protect your interests. 

Client feedback for our handling of compliance alongside R&D claims underscores how proactive support turns potential stress into manageable processes. 

Reducing the Risk Long-Term

Ultimately, prevention beats cure. By partnering with experienced accountants, investing in robust systems like Xero, and maintaining disciplined financial habits, small businesses can significantly lower their investigation risk. Accurate records not only deter scrutiny but also provide valuable insights for growth. 

At Jan McDermott Chartered Accountants, we’re committed to supporting Wirral and UK-wide clients with friendly, expert guidance, from routine compliance to handling HMRC enquiries. If you’re concerned about your tax position or want to review your setup, get in touch for a no-obligation discussion. With the right preparation, a tax investigation need not derail your business; it can even strengthen your financial foundations.